By: Nicole Vattimo
Earlier in the month, HuffPost published an interesting article (link here) on how our credit scores impact our homeowners insurance premiums. The article dissects a study completed by Quadrant Information Services. It's probably not surprising that the study found there is a direct correlation between a poor credit score and a higher homeowners insurance cost. What surprised me, however, was just how much higher your insurance premium could be if you have a lower credit score, when compared with someone who has a high score.
According to the article, "The study found that if you have a fair (i.e. median) credit score, you may pay 36 percent more for home insurance than someone with excellent credit. That’s up from a 32 percent increase in 2015 and 29 percent in 2014."
So, not only are you paying more for home insurance if you have an average credit score, but exactly how much more is increasing over the years.
"What’s more, if you have poor rather than excellent credit, your premium more than doubles, increasing by an average of 114 percent (up from 100 percent in 2015 and 91 percent in 2014)," says the article.
What percentage more you will pay if you have less-than-stellar credit varies state-by-state, with some states weighing a credit-based insurance score more heavily than others. The article lists the states that place the most importance on credit score, and explains what goes into calculating your credit-based insurance score.
The article also discusses why insurance companies use credit-based insurance scores. In short, credit scores are predictive of loss behavior. Meaning people with lower scores tend to have more insurance losses.
Interestingly, there are three states, California, Maryland and Massachusetts, that ban the use of credit in setting home insurance prices.
The article discusses the arguments against using credit score in insurance. The top arguments against this practice: (1) it is unfair to consumers in lower socio-economic demographics, and (2) "there’s no uniformity or standardization to how this data is used" since different insurers weigh credit scores differently. Meaning some may consider them heavily, while others don't.
Since we are all consumers of insurance, in some way or another, I think it's a very worthwhile read to better understand what may impact your premium, and what is happening in the insurance industry at large.
Full link to HuffPost article: http://www.huffingtonpost.com/entry/why-poor-credit-can-triple-your-homeowners-insurance_us_590b4c30e4b046ea176ae88b