Credit scores can affect interest rates on credit cards and mortgages, among other types of loans. Once you get a home, your credit score can also determine how much you pay for home insurance.
Having a fair credit score may mean paying 36 percent more for home insurance than someone with excellent credit, according to a study by Quadrant Information Services, an insurance data provider.
On average, a consumer with a poor score pays at least twice as much as one with an excellent score in all but nine states, researchers found, increasing an average of 114 percent.
Quadrant calculated the rates from six major insurance companies. The averages are based on premiums quoted to a hypothetical 45-year-old with a 1,800-square-foot, two-story, single-family home built in 1976. The test policy offered $140,000 in dwelling coverage, $300,000 liability coverage and a $500 deductible.
Credit-based insurance scores
Insurance companies use what’s called credit-based insurance scores, or CBI scores, to help determine rates. They’re one way to measure a credit score. Other methods are used to measure creditworthiness when applying for a credit card, or to get a mortgage.
A CBI score of 760 or higher is considered preferred and below 600 is poor, according to the Insurance Information Institute, or III.
Credit-based insurance scores are collected from a number of factors in your credit reports to help determine your likelihood to file a claim. People with low scores typically have more insurance losses than people with higher scores. That makes them more expensive to insure.
Money management skills reflected in credit report scores can be predictive of behavior, and can show up in daily decisions such as making routine repairs to their car or home, the III says.
“People who manage money carefully may be more likely to have their car serviced at appropriate times and may also more effectively manage the most important financial asset most Americans own — their house — making routine repairs before they become major insurance losses,” the insurance industry group writes on its website.
Every state except California, Maryland and Massachusetts allow credit to be used to set home insurance rates.
Other factors that are used in setting homeowner insurance rates include the age of the home, your prior insurance loss history, construction type of the home, condition of its roof, and quality and proximity of firefighting services, according to the Insurance Information Institute, an industry group. It can also help to have smoke detectors, fire alarms and a security alarm in a home.
A Comprehensive Loss Underwriting Exchange report, called CLUE for short, is used to set rates for homeowner policies, but it isn’t used to determine a credit-based insurance score by insurance actuaries. A CLUE report reflects the claims history of a property and not the credit history of the policyholder.
How the scores are used
Not all insurance companies use credit-based insurance scores the same way. But the score is based on data collected from the three major credit bureaus — Equifax, Experian and TransUnion. Any information that’s on those credit reports should be checked by consumers at least once a year for accuracy.
The data that’s used includes:
- Outstanding debt.
- Length of credit history.
- Late payments.
- New applications for credit.
Insurance companies can weigh the scores differently, making comparison shopping difficult. While consumers can access their credit scores from the credit bureaus, they can’t get ahold of their credit-based insurance scores.
What consumers can do
While consumers can’t get their credit-based insurance scores, they can work to improve their overall credit score and can check their credit reports for free once a year.
Errors to check for on a credit report include making sure your name is correct, that all of the credit accounts listed belong to you, and that any bankruptcies listed are accurate.
To improve a credit score, the best thing to do is to pay all of your bills on time, especially credit card bills, because they have the biggest impact on a credit score.
It can also help to limit the usage of your available credit to 30 percent, pay the balance in full each month, and not to open new accounts while you’re shopping for a home.
After you’ve improved your credit score, ask your insurer for a rerating. That’s where they will review your premium for a possible reduction, and you can ask for one every 12 months.