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How Credit Scores Can Affect Homeowners Insurance Premiums

Jason Metz

We’ve previously covered how credit scores may affect your car insurance rates. Similarly, your credit score can also affect your homeowners insurance premiums. With the exception of California, Maryland, and Massachusetts, where credit scores are prohibited from being factored into homeowners insurance rates, FICO reports that approximately 85% of homeowners insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.


Why Do Insurance Carriers Look at my Credit Score?

Credit-based insurance scores were introduced in the early 1990s and use certain elements of a person’s credit score to predict how likely they may be to have an insurance loss. A credit score is a numerical expression to represent your creditworthiness. Financial institutions supply information to credit bureaus on your financial performance, which is then used to calculate your score, a numerical range from 300 – 850. The higher the score, the better. Most adults have a credit score. If you have a credit card, if you’ve taken out a loan, or if your checking account has an overdraft protection, you will more than likely have a credit score. 


While many factors are determined when adjusting insurance premiums, such as geographical location and loss history, the underlying philosophy is that a good credit score is indicative of how a person manages their financial affairs and people who manage their finances well tend to manage other aspects of their lives responsibly, which translates into less claims. 760 and above is considered a good credit score, while below 600 is considered a bad score.


How Much Does My Credit Score Affect My Premium?

Much like auto insurance rates, determining how much your credit score affects your homeowners insurance rates is less straightforward. In 2015, the Arkansas Insurance Department published a report detailing a credit score’s influence on insurance. They found that the use of credit scores resulted in a decrease in premiums for over 57% of consumers and just a 16% increase in cost for others.


Is This Fair?

It should be noted that the use of credit scores is somewhat controversial. As mentioned, California, Maryland, and Massachusetts have prohibited the use of credit scores in determining homeowners insurance rates. Other states may consider eliminating the use of credit scores, but as of right now, most states seem to believe it’s a fair practice. Insurers are legally allowed to look at your credit score, number of credit cards, late payments and possible bankruptcies to determine your coverage rate. That said, insurers are not allowed to use it to determine whether or not you qualify for a policy. Rather, they can use it solely to determine a rate.


Not everyone thinks this practice is fair. Many see it as a fine line to price optimization, which is a pricing practice based on an individual’s occupation, education, and other factors. Companies use data mining to determine which individuals are unlikely to switch carriers, and they raise their rates accordingly. As more and more states ban this practice, we could see a change in credit score practices in homeowners insurance.


Price optimization is often looked at as discriminatory and has been banned in many states, as it typically ends up hurting those with low income. Credit scores in relation to policy prices could work in a similar manner, and in time, perhaps, more states will ban its usage. 


What Should I do if I Have Bad (or No) Credit?

While legislative action may eventually restrict this practice, depending on your state, it’s in your best interest to take steps to improve your credit score. Remember, credit scores are formed over time and good credit takes time to build, though small mistakes such as missed payments can bring your score down. Still, there’s no reason to be discouraged. There are short-term priorities as well as long-term focuses that you can keep in mind. Focusing on financial stability as an overall strategy may result in lower homeowners insurance premiums as well as other benefits.

If your insurer relies heavily on credit information, you may want to get quotes from companies who don’t use credit scores as prominently when pricing your premium. If the savings is significant, consider switching. You can get free homeowners insurance quotes at EverQuote.com


In the short term:

If your insurer relies heavily on credit information, you may want to get some quotes from companies who don’t use credit score as prominently when pricing your premium. If the savings is significant, consider switching. Not all homeowners insurers are the same, and you may find a better match by receiving quotes from multiple carriers.

Some other suggestions for short-term improvements:


In the long term:

  • Use credit cards wisely (never to live above your means).

  • Prioritize paying off credit card and other "bad" debt.

  • Be aware of the dangers of opening multiple credit lines. That signifies risk – as chances are, a new credit line means you are looking to spend more.

  • Check your credit report for errors. They do happen! For example, verify any late payments to ensure they were truly missed.

  • Seek out new quotes when your credit score changes. Your rates could improve!



Fair Credit Reporting Act (FCRA):

For now, keep your rights in mind. The Federal Trade Commission’s Fair Credit Reporting Act (FCRA) requires that any user of a credit report notify the consumer if the report resulted in an adverse action. With homeowners insurance, this would be a denial of a premium or a raised policy rate. These notices often come with your policy or policy renewal. Read over your policy carefully, as the notifications may be hidden. If you see reasons listed, perhaps, it’s time to shop around!