Poor Credit Makes Homeowners Insurance Higher

By RE/MAX Jaret & Cohn | Aug 20, 2014
Photo by: Dale Martin

Daily Real Estate News, Tuesday August 19, 2014

A lower credit score not only makes it hard to qualify for a loan: Some home owners are finding that after moving in, bad credit can make the costs of homeowners insurance higher, CNBC reports.

Home owners who have poor credit pay 91 percent more for homeowners insurance than those who have stellar credit, according to a new report from Brankrate.com and insuranceQuotes.com.

Credit-Score Changes to Help?

Home owners with a fair or median credit score may pay 29 percent more for homeowners insurance than someone with stellar credit, according to the report.

"This is another example of why credit is such an important part of your financial life," Laura Adams, senior analyst with insuranceQuotes.com, told CNBC. "Maintaining a good credit history suggests that you're a less risky customer and can lead to several hundred dollars in annual homeowner's insurance savings."

How insurance companies weigh a person's credit score can vary greatly from company to company and even state to state. There is no standard for how insurers figure credit into insurance costs, according to the report.

Yet, "there is an undeniable correlation between credit information and insurance risk," says Anna Bryant, a spokeswoman for State Farm Insurance, which uses credit scores to determine individual homeowners insurance rates. "It is a correlation in terms of the frequency a person could have a claim and the severity of their claim."

Indeed, insurers began using credit-based insurance scoring in the early 1990s, when FICO studies found a correlation between a person's credit and his or her likelihood of filing a claim.

Bryant says that State Farm does not look at the entire credit score, but only aspects of it, to determine a person's homeowners insurance rate, but she declined to elaborate.

Just how much impact a lower credit score can have on premiums can greatly depend on what state you’re from, too. In the Bankrate.com report, the following five states showed the greatest average premium increase to homeowners insurance when an excellent credit score was downgraded to fair:

  1. Montana: 65% increase
  2. Washington, D.C.: 60%
  3. Arizona: 55%
  4. West Virginia: 53%
  5. Virginia: 52%

"I'm pretty shocked that even with a so-called fair credit score, you could still wind up paying 50 percent more than someone in the excellent category," says Bob Hunter, former Texas insurance commissioner and current director of insurance at the Washington, D.C.-based Consumer Federation of America.

Source: “If You Have Poor Credit, You May Pay Nearly Double for Home Insurance,” InsuranceQuotes.com (Aug. 14, 2014) and “How Poor Credit Costs You on Homeowners Insurance,” CNBC (Aug. 14, 2014)

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