How your credit score can affect your homeowners insurance rates

Your credit score helps homeowners insurance companies determine the risk of insuring your home and how high or low your insurance premiums will be. Insurers look at a number called a credit-based insurance score.

When you apply for homeowners insurance, the insurance company will run their own version of a credit check to determine how much of a risk you’ll be to insure. If you have a good credit score, your insurer may view you as a “low-risk insured” and charge you less in insurance premiums. 

Conversely, if your credit score is bad, you’re viewed as riskier to insure and therefore you’ll generally pay more in homeowners insurance premiums. Homeowners who have a history of credit issues are generally more prone to file claims than homeowners with unblemished credit, and because of that, are typically charged higher rates.

The credit check that your insurance company runs is less extensive and pries less into your financial background than a normal credit check. What the insurance company looks at is your insurance score, or your credit-based insurance score. Your insurance score is a calculation of some (but not all) of the factors in your credit history.

Key takeaways

  • Insurers consider multiple factors when determining your homeowners insurance premiums, including certain parts of your credit score

  • Also known as your credit-based insurance score, this number helps insurers determine how likely you are to file an insurance claim

  • The higher your credit-based insurance score, the lower your rates will be

What is a credit-based insurance score?

While a FICO credit score helps lenders gauge how likely you are to pay back a loan or a line of credit, a credit-based insurance score measures the likelihood of you filing an insurance claim. Most insurance companies will check your credit-based insurance score when you apply for coverage or renew your policy. 

There are several different companies that provide insurers with insurance scores, and each company calculates that number a little differently. According to the NAIC, your FICO credit-based insurance score is based on five key areas with varying weights:

  • Payment history (40%) - How well you’ve been able to pay off outstanding debt in the past

  • Outstanding debt (30%) - How much debt you currently have

  • Credit history length (15%) - How far back your open lines of credit go

  • Pursuit of new credit (10%) - If you’ve applied for new lines of credit recently

  • Credit mix (5%) - The kinds of credit you have open (mortgage, student loans, auto loans, etc)

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Why do homeowners insurance companies consider credit-based insurance scores?

It may seem confusing why insurance companies use credit-based insurance scores when determining homeowners insurance premiums, but research has shown that there’s actually a correlation between certain credit characteristics (those that are included in your insurance score) and insurance losses, according to the National Association of Insurance Commissioners.

The thinking goes that if you have good financials and a good credit score, that means you’re staying on top of your mortgage payments and maintaining the property — making necessary house repairs and providing upkeep when need be. A bad storm will probably pose less of a risk to a home that’s well taken care of and structurally sound than one that isn’t. In the insurer’s eyes, all of these factors are interconnected.

On the flip side, homeowners with a poor credit-based insurance score are more likely to have outstanding debt and are viewed as more likely to depend on an insurance payout in the event that something bad happens. 

How to get homeowners insurance with bad credit

As we touched on earlier, insurance companies are permitted to use credit-based insurance scores as a factor in denying or canceling your policy, but it can’t be the sole reason. So generally speaking, you can have bottom-of-the-barrel credit and still get insured.

But keep in mind that having a bad credit score creates yet another obstacle to getting your home insured. Take for instance a homeowner with a history of frequent claims and an older home (two characteristics that could be marked as “high risk” during underwriting) — having a bad insurance score on top of that could make it harder for them to get homeowners insurance on the private market. 

If you’re having trouble obtaining insurance on the private market, you can get covered through your state’s FAIR Plan — a last-resort option for high-risk homeowners. 

How to improve your credit-based insurance score

Your credit score and insurance score are different, but the ways to improve them are similar. To improve your credit-based insurance score, be sure to do the following:

  • Pay all your bills on time

  • Pay above the minimum payments for your credit card bill

  • Only apply for lines of credit when necessary

  • Keep your credit utilization low on existing lines of credit

FAQs

Is it legal for insurance companies to check your credit?

In most states, it is perfectly legal for insurance companies to use credit-based insurance scores as a factor — but not the sole basis — for increasing your insurance rates or denying, canceling, or not renewing your policy.

Just two states (California and Massachusetts) ban the use of credit-based insurance scores altogether, and two states prohibit the use of insurance scores for specific types of insurance (Hawaii for auto insurance and Maryland for homeowners insurance), according to the American Property Casualty Insurance Association.

Does a credit-based insurance check impact my credit score?

When a homeowners insurance company checks your credit score, it’s considered a “soft pull” or “soft inquiry” meaning it won’t affect your credit score. You’ll be able to see the credit check on your report, but it won’t be visible to future lenders. Only hard inquiries (or hard pulls), like an application for a new line of credit or house loan, impact your credit score.

What is a good credit-based insurance score?

Credit-based insurance scores may range anywhere from 200 to 997, depending on the company. What range is considered good will also be up to the insurance company, but the higher your score is the less risky you are to insure and the lower your rates will be.