Poor Credit? Expect Higher Insurance Bills
Home owners' credit history may have a big impact on how much they pay for home insurance, according to a new study commissioned by insuranceQuotes.com. The study examined the average impact that a credit-based insurance score has on what owners pay for home insurance.
Owners who have a fair – or median – credit score were found to pay 32 percent more for home insurance on average than someone with stellar credit, the study found. That's up from a 29 percent increase last year.
For those with poor credit, owners' premium may rise by an average of 100 percent, the study found.
According to insuranceQuotes.com, a credit-based insurance score is different from a credit score and is comprised of several factors from a home owner's credit reports – such as length of credit history, late payments, collections, and new applications for credit. The score assigned is to help insurers assess the likelihood an owner will file a future claim.
"It has been proven statistically time and time again that the way someone manages his or her credit correlates very strongly to whether or not they will have a future home owner loss," says Lamont Boyd, insurance underwriting expert at FICO. "Not that every insurer uses this data the same way. They all have their unique models. But the underlying principle is the same across the board."
Jim Lynch, chief actuary with the Insurance Information Institute, says that the higher a home owner's credit score, the less likely that person is to incur claims. However, those with worse credit scores have been found to be more likely to file a claim in the future, Lynch says.
About 90 percent of home insurers use credit-based insurance scores in states where it's permitted. The following states do not allow the use of credit in setting home insurance rates: California, Maryland, and Massachusetts.
According to insuranceQuotes.com, the following five states showed the largest average premium rises for owners who have fair credit opposed to excellent credit:
1. Montana: 66% increase
2. Washington, D.C.: 61%
3. Texas: 55%
4. Colorado: 54%
5. Arizona: 54%
The following five states had the largest premium increases when owners saw their credit drop from excellent to poor:
1. West Virginia: 202% increase
2. Washington, D.C.: 185%
3. Ohio: 185%
4. Montana: 179%
5. New Hampshire: 168%
Source: "How Much Credit Affects Your Home Insurance Rate May Surprise You," insuranceQuotes.com (Aug. 23, 2015)