We often hear about the importance of credit scores in buying a home or vehicle, or qualifying for a personal loan or credit card. In a sense, this isn’t very surprising. After all, if you are going to borrow money, it seems reasonable that you prove you can repay it. Credit scores are a time-tested method of assessing someone’s likelihood of repayment.
A lesser known use of credit scores, is to set premiums for home and auto insurance (this is allowed in every state except for California, Massachusetts, Maryland for home insurance, and Hawaii for auto insurance). In fact, your credit score can play a massive role, in deciding the sort of insurance premium you’ll be required to pay. Insurance Quotes, a free platform to shop for insurance, commissioned a study by Quadrant Information Services, to dig further into this question. If you are a real estate, lending or insurance professional, the information below may be of interest to your clients, in helping them save on insurance.
According to the study, homeowners with a fair or median credit score (so, half of the populations credit scores are below their score, and half are above), typically pay 36% more for home insurance, than someone with excellent credit. Those with poor credit pay 114% more than individuals with excellent credit. In many states, the difference is massive; just see the chart below, taken from the original Insurance Quotes study.
Auto insurance rates are also heavily affected by credit scores. According to a 2015 studyfrom Consumer Reports, credit scores play such a large role in deciding insurance rates, that in dozens of states, driver’s with poor credit pay more than driver’s with excellent credit, but who were caught driving under the influence of alcohol. Let’s reflect on that for a moment. Insurers think a driver who was caught driving intoxicated, which is clearly dangerous, will cost them less in potential claims than someone with weak credit. Good credit isn’t enough, since drivers with merely good, as opposed to excellent credit, typically pay anywhere from 10 to 30% more than those with excellent credit. Let’s take a look at what happens in America’s second largest state, Texas.
It is also important to note that the sorts of credit scores used in setting home and auto insurance rates, are not the same ones you get for free online. For auto insurance, insurers use a special version of FICO, which ranges from 250 to 900, or a score produced by LexisNexis, which ranges from 500 to 997, and lastly, a score from TransUnion, with a range of 300 to 850, or from ChoicePoint, which range from 300 to 997. These scores assessone’s likelihood of filing a claim in the future, and the size of that claim. Insurers calculate these scores based on the data contained in the C.L.U.E. specialty credit report (produced by LexisNexis), or those produced by Drivers History, or Insurance Information Exchange (iiX).
What sort of information do auto insurance credit scores take into account? Much of the same information as traditional FICO scores, such as one’s account payment history, and the amount of debt one carries, as well as whether you’ve ever defaulted on accounts, or filed bankruptcy. In addition, insurers also take into account your prior history of filing accident/insurance claims, and the size of those claims, as well as whether you’ve had any tickets or moving violations. By crunching all of this data through a series of complex formulas, auto insurers can decide whether what sort of rates they want to offer you.
What about home insurance credit scores? These scores, just like auto insurance scores, are designed to predict the chances that you’ll file a (costly) claim. These scores take account of much of the same information as a regular FICO score, looking at your debt amounts, age of accounts, and negative credit items. Additionally, insurers will also consider factors specific to your home’s insurance risk, such as whether you live in a fire-prone area, in an older home, or you own a dog. All of these factors will be crunched into an algorithm, to decide what sort of insurance rate you ought to pay.
What can you (or your clients) do to reduce home or auto insurance rates? Obviously, one has limited control over prior accidents and claims (although being safe driver never hurt anyone), or whether you live in an area vulnerable to fires or earthquakes. Yet, when it comes to credit behavior, there is quite a bit which is in your hands. Always pay your bills on time. Keep your debt low, and don’t spend more than you need to.
If you (or your client) has negative items on a credit report, remember that they can be removed, by use of the Fair Credit Reporting Act (FCRA). Under the provisions of that law, anything which is not accurate, verifiable and timely, must be removed from your credit reports. Quite a few credit items fall into this category. After these negative items have been removed from credit report(s), your insurance credit scores will be higher.
You/your client can now approach your insurer, and request a rescore of your insurance credit score, and an adjustment of your insurance premiums. If your score comes back stronger than before, you should recieve a reduction in your insurance rates. If your insurer is unwilling to offer a lower rate, you should shop around for insurance from a new provider. For auto insurance, comparison websites like The Zebra and NerdWallet are a good place to start. You can also shop directly with major insurers, like Geico, Progressive, Nationwide, State Farm, Allstate and many more. For home insurance, you can visit some of the companies listed above, or shop from this list.
Excessive home and auto insurance rates can cost hundreds, even thousands of dollars extra, every year. That money could be used for so many other things. Better credit puts you on the path to insurance savings today.
