AgentIndustry News

Poor credit scores are bad for mortgage rates — and homeowners insurance rates, too

Those with poor credit pay double what borrowers with excellent credit pay to insure their home, study finds

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Takeaways:

  • Buyers are aware that credit scores will affect their mortgage interest rate but aren’t always aware of other affected bills, like homeowners insurance.
  • A recent insuranceQuotes.com study indicates that homeowners with poor credit could pay twice as much to insure their homes.
  • Even if you have a “fair” credit score, you may pay 32 percent more for homeowners insurance on average than someone with excellent credit.

Many homebuyers are aware that having certain credit scores may affect their mortgage interest rate, but how will their credit situation affect other payments like homeowners insurance? According to a recent insuranceQuotes.com study, homeowners with poor credit can expect to pay twice as much to insure their home as borrowers with excellent credit.

Homeowners with “poor” credit can expect their homeowners insurance premiums to increase by an average of 100 percent, an increase over the 91 percent that the same study reported last year. Even if you have a “fair” credit score, you may pay 32 percent more for homeowners insurance on average than someone with excellent credit. That’s up from a 29 percent increase in 2014, according to insuranceQuotes.com.

There is also great disparity between states in how homeowners’ credit scores play into how much they will pay for insurance, insuranceQuotes.com noted.

Three states — California, Massachusetts and Maryland — actually prohibit insurers from using credit scores to calculate homeowners insurance premiums. Elsewhere, about 90 percent of insurers use credit-based insurance scores in states where the practice is allowed.

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People with poor credit pay at least twice as much as people with excellent credit in 38 states and Washington, D.C.

West Virginia’s whopping 202 percent increase is the highest in the nation, followed by the nation’s capital and Ohio at 185 percent each and Montana at 179 percent, insuranceQuotes.com found.

Howdoescreditaffectyourhomeinsurancerates_2015

“In most states, insurers are putting more emphasis on credit scores this year,” said Laura Adams, insuranceQuotes.com’s senior analyst. “The impact of a poor credit score is higher now than it was last year in 29 states and Washington, D.C., while it is lower in just 17 states. It’s more important than ever for people to maintain a solid credit rating by paying their bills on time, keeping their balances low and correcting errors on their credit reports.”

The practice of credit-based insurance scoring is not without critics. Amy Bach, executive director of San Francisco-based nonprofit United Policyholders, has long maintained that credit scoring primarily hurts low- to moderate-income earners, since they are the ones with typically lower credit scores.

“The damage that leads to many home insurance claims is often random, sudden and accidental — things like break-ins, slip-and-falls or weather events,” Bach says. “There is no way an individual’s credit score has a causal connection to those events.”

But Jim Lynch, chief actuary with the nonprofit Insurance Information Institute, disagreed saying credit information is an excellent predictor of future losses for insurers.

“The higher the credit score, the better the person’s credit and the less likely they are to incur claims. And the worse the score, the more likely they are to file a claim in the future,” Lynch said.

InsuranceQuotes.com advised homeowners with poor credit to boost their credit scores by paying all credit card debts and installment loans on time; refraining from opening any new credit accounts unless it’s absolutely necessary; keeping credit card balances at about 25 percent of their available credit limit; and finally, shopping around for the best insurance price.

“If you think you are being underserved and overcharged, you should go out and shop,” Lynch said.

Email Amy Swinderman.