There’s a reason why insurance rates aren’t universal; insurers use many variables to generate your homeowner’s premiums, such as credit history. Insurance companies examine your financial history for things like whether you have a lot of debt or frequently make late payments/miss paying your bills. This information forms your credit-based insurance (CBI) score.
Your CBI score is a personalized score that allows insurers to set your premiums. This is a good thing because if you’re meticulous at paying your bills on time and have a manageable amount of debt, you wouldn’t want to pay the same rates as someone with less than stellar credit history. In fact, if you have a great credit score, it could shave 20% or more off your premiums.
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Credit-Based Insurance Scores
When insurance companies investigate your financial history, they’re looking to see whether you’re “low-risk” or “high-risk” to insure; low-risk means lower premiums. Your CBI (or insurance score) is a number value that determines your risk level and home insurance rates.Although every insurance company’s formula is different, typically, when they look into your CBI, these are the areas they investigate:
- What is the length of your credit history?
- How many bank accounts do you have, and are these bank accounts in good standing?
- Do you frequently have late payment charges?
- Do you have any accounts in collection?
- Do you have any past-due accounts?
- How is your credit usage?
- Do you have many credit applications?
However, debts are weighted differently; for instance, $150,000 in credit card debt negatively affects your premiums worse than $150,000 owing on a mortgage.
Why Insurance Companies Use CBI Scores
CBI scores are used to help set premiums because insurers have found a link between a policyholder’s CBI scores and their likelihood of filing homeowners insurance claims. For instance, a homeowner who maintains their home decreases the likelihood of storm damage to their property, so they are less likely to file a claim.
In a nutshell, the better your credit history, the lower your insurance premiums.
Do All States Use CBI Scores?
Not every state permits insurance companies to base their premiums on your credit history. The states that do not allow insurance companies to use CBI scores to determine your homeowner’s insurance rates include:
- California
- Hawaii
- Maryland
- Michigan
- Massachusetts
- Washington
These states still use a variety of factors to determine your insurance premiums, just not your credit score.
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Does Credit Scores Affect Homeowners Insurance?
If you live in a state that permits insurance companies to use CBI to set premiums, credit scores will affect your rates and every insurer uses different components to generate premiums.Some fast facts about CBI are:
- Credit scores, on average, range between 300-850.
- The average score ranges between 600-750.
- Scores are unique to every policyholder as they’re based on the insurer’s CBI model.
- Excellent scores equate to 20%+ premium savings.
- Poor scores (below 570) can lead to premiums doubling.
In some cases insurance companies will be more lenient if you notify your insurer of your life circ*mstances; for example, if you’ve maintained decent credit but recently experienced a death in the family that caused your credit to slip.
Can You Get Affordable Premiums With Bad Credit?
If your credit is not perfect and you live in a state that allows insurers to base rates on your credit history, you will likely still be eligible for home insurance. Although, it’s important to realize that high-risk policyholders will pay steeper rates, and in some cases, very high-risk individuals will be denied coverage.Although insurers cannot deny you coverage exclusively because of bad credit, if you have another qualifying “red flag” like living in an older home or having a lot of home insurance claims, then you can be denied.Here are some other things you need to know about how bad credit can affect your homeowner’s insurance rates:
- If you have bad credit with few claims and can prove you maintain your property, you may be eligible for savings.
- You may have bad credit now, but improving it over time can lower your insurance rates.
- If you’re having difficulty finding coverage because of bad credit, you can still get last-resort coverage through your state’s Fair Access to Insurance Requirements (FAIR) Plan. Keep in mind that if you qualify, rates can be expensive and less comprehensive.
Poor credit isn’t the be-all, end-all when it comes to home insurance, but it can cause you to pay higher rates.
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The Bottom Line: Does Credit Score Affect Homeowners Insurance?
If you live in a state that allows insurers to use CBI to determine your premiums, whether your credit score is low or high-risk, your credit history will affect your rates. If you are considered low-risk because of a good credit score, your rates will be lower than someone who is high-risk.
So, be sure to shop around as every insurance company uses different modeling to generate premiums. Then, once you have a few quotes, you’ll be able to select the best policy for you, whether that’s the lowest rates or a more comprehensive plan.
