Insurance Rate Increase Based On Your Credit Score

We all know that banks review credit scores when making lending decisions to evaluate the risk of default on a loan. But, surprisingly, there is also a strong emphasis on credit score investigation when determining homeowner insurance rates. If you’re a homeowner, your credit score plays a large role in pricing your premium. The lower the score, the higher the risk you’ll file a claim for a loss, hence why they feel you should pay more.
Based on reporting from six major insurers that represent 60% of the market in each state, the condition of your credit score will lower or raise your premium. If you have poor credit, you may end up paying twice as much as someone with a stellar credit score on average.
However, according to a report from insurance data firm Quadrant Information Services, even those with fair credit will usually pay about 32% more than those who are able to maintain stellar credit.
“It’s all about trying to predict the likelihood of a claim,” said David Snyder, vice president of policy department and research for the Property Casualty Insurers Association of America.
Despite that, there are several consumer groups that object to using this method in determining a person’s insurance score. They feel it could potentially penalize someone unfairly when they may have been going through difficult financial times.
This argument may be valid since most insurers use their own scoring model, and some from an outside vendor. This could mean other insurers are looking to add more emphasis on their investigation so as to validate a higher premium rate if someone has poor history.
In a 2007 report, the Federal Trade Commission found insurance scores based on a person’s credit history were an “effective predictor” in the cost and number of automobile insurance claims consumer would file. Yet, they have also stated that there was no clear evidence to explain that correlation.
States such as Maryland and Massachusetts are against this investigatory process used by insurers and don’t allow credit history to be used in setting the rates for homeowner insurance rates, while other states choose to instead limit its use.

For these reasons, it would be very wise to be cognizant of your credit score and any errors it may contain. Shopping around with varied insurers will help those with poor or excellent credit to find the insurer that places the right emphasis on the area that best benefits them on pricing.

If you feel like taking the first steps in improving your credit score and avoiding these difficulties, feel free to reach out to me. I would be happy to get you on the right path towards improving your credit score.


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