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How your credit score can affect your homeowners insurance premium

By Compuquotes Team on November 20th, 2010

Do you know your credit score?

Chances are that if you don't know the precise number -- it's going to be between 300 and 850, with most people landing in the 600-700 range -- you at least know what causes that number to go up or down. You also probably know that the lower your score, the more you will pay in interest on credit cards, mortgages and other loans.

But what you may not be aware of is how much your credit score can affect your home insurance premiums. A 2005 study by the General Accounting Office found that two-thirds of consumers didn't realize their credit history affected their homeowners insurance rates.

According to the Insurance Information Institute, insurance companies view your credit history as a reflection of your risk for filing homeowner insurance claims: the lower your score, the more likely you are to file a claim. Insurance companies use credit scores to develop a numerical ranking they call an "insurance score," and they use that score to determine whether or not to sell you a homeowners insurance policy and, if so, what your property insurance premium will be.

What goes into a credit score

A credit score is based on your credit history, which is a multi-year record of your credit accounts, balances and payments. You are entitled to one free credit report each year from the three reporting companies -- Equifax, Experian and TransUnion -- that collect and update your information. In addition to all your payments and balances, you'll also see entries for bankruptcies, foreclosures, liens and judgments against you.

Your credit score, which you have to pay to see -- it typically costs less than $8 -- is a snapshot at any given time of how well you are doing financially. Higher scores, according to the III, typically mean you are more likely to be approved for new loans or increased lines of credit at a lower interest rate.

The Federal Citizens Information Center (FCIC) describes a score above 700 as "very good." But a score below 600 is an indicator of high risk to lenders, and could lead to you being turned down for a loan or being charged higher rates.

The insurance scoring system

The FCIC says the "credit-based insurance score" used by insurance companies is modeled after credit scores.

According to the Federal Trade Commission (FTC), each insurance company can develop its own scoring model or use a generic model by a scoring company. Scoring systems typically select a random sample of their customers and identify characteristics related to risk. Insurers can then assign a score to each characteristic based on how well it predicts risk. The lower the score, the more likely a person is to file a claim. By law, scoring systems can't take into account race, sex, marital status, national origin or religion.

While the credit report system is fairly transparent, the insurance scoring system is more controversial because -- as a proprietary business tool -- it is cloaked in secrecy. According to the FTC, only the insurance company that developed the particular scoring system used to evaluate your application knows how you might improve your score.

How to improve your scores

Nevertheless, the FTC and other agencies say there are many proven ways to improve your credit score and your insurance score. These include:

  • Review your credit report for errors and get mistakes corrected
  • Make your payments on time. If you can't make a full payment, contact your creditor and see if you can pay part of the payment by the due date and the rest a week later
  • Apply for and open new credit accounts only when you need them
  • Keep balances on credit cards low

By improving how you handle credit -- making payments on time and not maxing out your credit limits -- you can improve your insurance score and in turn lower your rates on auto or homeowners insurance, the FCIC says.

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