Insurance companies consider many factors when calculating home insurance quotes. One of these factors is your credit score, via your insurance score. By improving your credit score, you may be able to increase your insurance score and qualify for a lower home insurance quote. Here's why.
Most Insurance Companies Use Insurance Scores
Between 85 and 90 percent of insurers consider insurance scores, which are derived from credit scores. In California, Maryland and Massachusetts, insurance companies aren't allowed to consider credit scores, and by extension insurance scores, when calculating premiums. In the District of Columbia and all other states, however, the practice is legal and commonplace.
5 Factors Affect Your Credit Score
Everyone's credit score is affected by five factors, some of which are more significant than others. In order of significance, they are the following:
- payment history (35 percent)
- debt load (30 percent)
- length of credit history (15 percent)
- new lines of credit (10 percent)
- types of credit (10 percent)
Together, these categories are used to calculate your credit score, which is a number between 300 and 850. Higher numbers equate to better credit. According to NerdWallet, here are some score ranges and their correlating credit ratings:
- 300 to 629 is bad
- 630 to 689 is fair
- 690 to 719 is good
- 720 and higher is excellent
When improving your score, any numerical increase is good. You should, however, set a goal to get into the bracket that is one step higher than where your current score is.
Your Credit Score Significantly Affects Your Insurance Quote
Although insurers usually consider credit scores indirectly through insurance scores, there is often a direct correlation between people's credit scores and their insurance premiums.
The Insurance Journal found that in most states where insurers consider credit scores, people with poor credit received home insurance quotes that were 91 percent higher than the quotes that people with excellent credit were given. If a policy's premiums are $1,200 every year, simply having bad credit could raise your premiums by $1,092, to $2,292 annually.
Florida was the only exception to this finding. Although the state lets insurers consider credit scores, the journal posited that the frequency of hurricanes and other natural disasters marginalize the role of credit when calculating quotes.
You Can Improve Your Credit Score
Because you have control over many of the factors that influence your credit score, you can improve it. There are three things you can start doing immediately to improve your score:
- not opening new lines of credit
- paying bills on times
- making extra payments to reduce your debt
The latter two actions, making on-time payments and additional payments, will have an especially noticeable effect on your credit score. They'll improve your payment history and reduce your debt load, which accounts for 65 percent of your score.
You May Have to Ask for a New Quote
Once you improve your credit score, you may have to call your home insurance company and request a new quote. Many homeowners' insurance plans are automatically renewed, and companies might not check your credit score when your plan renews. If there have been significant changes to the score, call them and let them know. They should be happy to run a new quote for you to see whether you qualify for better rates.
Individual homeowners have little control over many of the factors that homeowners insurance companies consider when they're calculating quotes. For example, you can't change the location of your home, the crime rate in your neighborhood or what material your home's made of. You can, however, improve your credit score -- and you can start doing it today. Take the steps necessary to improve your credit score, and contact your insurer once your score improves from bad to fair, fair to good or good to excellent. You might qualify for a lower home insurance quote.