Credit scores impact the premiums insurers charge for homeowners policies. Insurers have discovered that customers with higher credit scores file fewer claims, making them a better risk. Because of this, having a higher credit score reduces premiums for many types of insurance, including auto-, home-, disability-, and life insurance policies.
How Insurers Use Credit Scores in Determining Premiums
While to the uninitiated it may seem counterintuitive, credit scores are a major factor in the premiums insurance companies charge. In general, the lower your credit score, the higher your premiums. It simply comes down to mathematics. Insurance companies have pored over reams of statistics in search of factors that indicate who presents a higher and lower risk. Credit scores have a link to claims, so those with lower scores pay more.
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The good news for those with poor credit is that most insurers refrain from denying coverage based on low credit scores. Though the risk is higher for insurers, they offset it with increased premiums
How Much Do Low Credit Scores Impact Premiums?
The severity of the impact depends on the insurer and how low the score has sunk. In some cases, lower credit scores make purchasing home insurance difficult. Some insurers charge up to three times the premium based on bad credit.
Though poor credit impacts insurance premiums severely, their impact goes beyond FICO scores. Part of the reason credit scoring impacts premiums so severely is that they affect insurance scores. Insurance scores are a calculation companies use to further define the risk of each policyholder, and credit scores make up a large part of their computation.
What Is An Insurance Score?
Also known as credit-based insurance (CBI), insurance scores rate your overall financial stability and ability to repay loans. FICO scores make up a large component of your insurance score, and your CBI is what ultimately determines whether your credit standing helps or hinders your premium cost. Improving your insurance score goes a long way toward making home insurance premiums more affordable.
The surest way to increase your insurance score is by enhancing your credit score. If your FICO needs a boost, consider working on these areas:
By far, credit history is the most important in determining FICO scores. Credit history consists of your payment record for all accounts included on your credit report. Making all payments on time keeps this key component of your FICO score on your side. Missed payments for credit cards, auto loans, or mortgage payments can drag down your credit score for years. If your credit history needs repairing, be sure to make all future payments on time.
The Number of Credit Accounts
The number of accounts you have open is a double-edged sword. On the one hand, you need tradelines to build your credit and improve your score. On the other hand, too many open accounts reduce your rating. Why? Because you then have the potential to overextend yourself with loans, making you a higher credit risk.
Because of this, you should open new accounts in moderation. While establishing several credit card accounts can help you create a positive payment history, opening account after account just to qualify for discounts can work against your FICO score.
Revolving accounts are another double-edged sword when it comes to FICO scores. They create tradelines and establish credit history, which is positive. However, if you carry large balances relative to your available credit, your score can sink like a rock thrown into a river.
FICO experts recommend keeping almost all of your revolving credit available. Ideally, utilizing under 10% of your available credit card limits helps keep your score high. If you carry balances, pay them down quickly. When revolving credit utilization eclipses 30%, the impact on your score becomes steep.
Once you fall more than 30 days behind on payments, your credit score starts to take a serious hit. The impact can be especially severe if you pay your mortgage or auto notes late. Be sure to make at least the minimum payment on all accounts before a late payment hits your credit report.
Credit scores serve as an important component of your premiums. To ensure you receive the best home insurance prices, keep your FICO score up with on-time payments and responsible credit use.