For many homeowners, home insurance is essential for protecting their home and belongings in case of an accident, fire, natural disaster, or burglary. However, many homeowners interested in purchasing a home insurance policy may be concerned that their credit score could affect their insurance rates.
Before purchasing a home insurance policy, it’s a good idea to learn how insurance companies calculate premium rates and what you can do to earn better rates for your homeowner’s insurance.
What Are Home Insurance Premiums?
An insurance premium is a fixed, predetermined rate homeowners must pay over the course of their policy term. Depending upon the terms of your policy and the insurer, you may pay your premiums in monthly, quarterly, or yearly installments.
Higher insurance premium rates mean you pay more per term to keep your insurance active. Rates for homeowner’s insurance vary between insurers, homeowners, and different states. According to Quadrant Information Services, the average home insurance policy that covers up to $250,000 will have annual premium rates of about $1,383.
However, premium rates depend on the amount your policy covers, your age, insurance score, credit score, and claims history. The state where your home is located may also affect your premiums as each state has different standards insurance providers must follow, such as including additional coverage for common natural phenomena such as tornadoes in the area.
Factors Insurers Analyze When Determining Home Insurance Rates
In most cases, your insurance rates will correlate to how much your policy covers. However, home insurance companies also analyze a few other factors relating to your home and credit history when determining your policy’s premium rates.
Location
The location of your home can determine the premium rates you pay for your home insurance policy. Different states have different homeowner’s insurance rates, and insurance companies will use your home’s zip code to determine your rates.
Zip codes located in areas more prone to certain types of natural disasters, such as wildfires or severe weather, may result in higher premiums to accommodate additional coverage amounts for those incidents, as will areas with higher property crime rates. For example, rates may be higher in Florida than in other regions of the U.S. because of state-mandated hurricane insurance.
Claims History
Insurance companies may review each past claim you have filed to determine your home’s level of risk. Past claims for fire or storm damage may cause you to be a higher risk by an insurance company. If your policy covers infestations by termites or other pests, past claims for termite damage or pest control may also result in higher premium rates.
Home’s Age
Older homes generally tend to require higher premium rates due to the increased risk of damage or property destruction from the advanced age of materials. Newer homes are less risky for insurance companies to cover, so these homes will often get lower premium rates than older structures.
Credit-Based Insurance Score (CBI)
Your credit-based insurance score (CBI) plays a role in determining your home insurance premium rates. These scores are based on your credit report and are used to predict how likely you are to make an insurance claim.
Insurance companies tend to prefer providing coverage to homeowners with better credit scores, as they believe those with lower credit are more likely to make a claim because, on paper, their financial health is less stable. Therefore, homeowners with better CBIs will likely pay lower premium rates than those with poorer CBIs.
However, Hawaii, California, and Massachusetts don’t allow insurance companies to base homeowner’s insurance rates on the customer’s credit score or CBI. Other states also have laws that limit the insurer’s use of credit scores by not allowing a company to cancel or deny coverage based on the score.
What Determines Your CBI?
Your credit-based insurance score, or CBI, is a number your insurance company assigns you to determine how much of a financial risk you pose for coverage.
Your CBI is similar to a FICO credit score in many respects; however, there are a few key differences. Credit bureaus determine your FICO credit score in terms of how likely you are to pay back debt; individual insurance companies assess your CBI. These CBI scores focus mainly on how likely you are to file a claim on your home rather than your likelihood of paying back debt.
Credit stability is vital for most home insurance companies when determining your CBI score. The exact relationship between your FICO credit score and your CBI score may vary somewhat between multiple insurance companies or between different states. However, a good credit score will generally result in a better CBI score from your home insurance company than a poor one.
A few different factors are most likely to affect your ultimate CBI score. Good CBI scores, for example, are usually based on a lengthy history of good credit, multiple bank accounts and credit accounts in good standing, low usage of credit, and no late payments on your record.
On the other hand, poor CBI scores may result from factors such as a large quantity of past-due accounts on your record, bank or credit accounts that are in collection, numerous recent applications for credit, and high use of available credit on your account.
How to Improve Your Credit Score for Better Rates
When looking into how to improve your credit score overall, it’s a good idea to look at it in terms of each insurer’s or creditor’s perspective. Your FICO credit score is there to tell banks and credit companies how likely you are to pay back debt and, therefore, how much of a risk they are taking by extending you a loan.
From the perspective of a home insurer, they are looking at your score to see how much of a risk you are to take on as a policy.
Given this, there are a few things you can do to improve your credit score enough to get better home insurance premium rates. One of the most important things you can do is make all your bills payments on time. Late payments for things like credit card bills are one of the major factors that can negatively impact your credit score.
Taking out a personal loan can help improve your credit score by developing your credit utilization ratio and your payment history. If you make payments on time, you are less likely to be seen as a risk by homeowner’s insurance companies and may get better premium rates.
It’s also a good idea to pay more than your minimum payments on your credit card bills whenever possible. You can also limit how much you use your existing lines of credit.
Finally, only apply for new lines of credit when you have to. Excessive credit usage or applications for new lines of credit can result in a poor credit score and possibly cause higher homeowner’s insurance premiums.
Explore More About Homeowner’s Insurance With Finance is us
If you are a new homeowner looking to purchase a home insurance policy, you may have concerns or questions about your credit score and how it will affect your ultimate home insurance premium rates. With the right resources, you can take steps today to improve your CBI and potentially see lower rates on your home insurance policy.
Finance is us is an online resource that helps consumers make the best financial decisions for themselves and their families. Whether you are a new or experienced homeowner, you can visit Finance is us for all information you need to improve your credit score and get the best home insurance premiums to protect yourself and your property.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.
