Your Credit Affects Homeowners Insurance

We all know how important having a good credit history is. Our credit history affects our ability to get mortgages, car loans, and other financial products. Having a poor credit history will make it difficult, and sometimes impossible, to get money when needed. While this is the most obvious reason one should desire good credit, there are other benefits as well. Your credit history actually affects your ability to get a good rate on your next homeowner's insurance policy.

Having a good credit history pays off in the world of insurance as well as in the world of personal finance. For instance, the best rates and terms offered by homeowners insurance companies tend to go to those consumers who pay their bills and loans on time and in full each month, which is the information reported on a credit score. According to Selective Insurance spokeswoman Cynthia B. Heismeyer, many homeowner insurers will look at your credits history when deciding whether or not they are going to insure you and what rates they are going to offer.

Ms. Heismeyer, who is also Selective Insurance's Assistant Vice President of Corporate Communications, goes on to state, “Insurance scores, based partially or wholly on your credit information, help insurers assess risk and charge the appropriate rate based upon that level of risk."

Ms. Heismeyer also notes that, "Statistically, it has been proven that people with poor insurance scores are more likely to file a claim. Historically, homeowner's rates had been based on the characteristics of the structure itself. The insurance industry is now shifting the focus to include characteristics of the occupants, and insurance scores are one of those factors." In other words, you may find that your credit score has a bigger impact on your ability to get a good rate on homeowners insurance than the fact that you own a brick house, which has a low risk of burning.

According to Ms. Heismeyer, credit-based insurance scores from consumer's credit reports are what are used to determine the likelihood that a particular consumer will file a claim, and also how expensive those claims are likely to be. Universities, insurance companies, auditors, and insurance regulators have all conducted studies that have shown conclusive evidence to the fact that a consumer's credit history is a very strong indication of the likelihood that the individual will file a claim in the future. The fewer claims that are filed by a consumer, the less expensive that consumer will be to insure. Thus, insurers can offer better rates to those consumers who pose a low risk of filing a claim. Since credit scores are a good indication of this likelihood, it makes sense that credit scores are also a good way to determine which rate a consumer should be offered.

These facts about credit-based insurance scores come from the Insurance Information Institute of New York:

- These scores allow the insurers to give better rates to those who pose a low risk since they cost less to insure.

- Since insurance scores cannot look at consumers' incomes, addresses, marital statuses, races, nationalities, or ages, they are an objective and "blind" way to assess risk.

- Insurance scores provide more choices for consumers by promoting competition. When insurance companies are forced to provide lower rates through competition, the consumer with a good credit rating is the one who wins.

Dave Snyder of American Insurance Association feels that one benefit of credit scores in the homeowner's insurance equation is the most important. According to Mr. Snyder, "They enable insurers to offer many more pricing levels than before." As an example, Mr. Snyder points out that those with "good credit-based insurance scores can get lower premiums on their homeowners insurance than they could have, say, 10 years ago before credit scoring came to the forefront."

According to Mr. Snyder, who is assistant general counsel for American Insurance Association in Washington, D. C., "The addition of credit scoring gives the homeowners insurance company a clearer idea on how to price a particular risk, and, in the process, gives consumers assurance that they're not paying more than they should for coverage."

Mr. Snyder believes that history has proven that financially responsible individuals with good, solid credit histories are likely to have fewer losses, and thus fewer claims, than those individuals with poor or unstable financial histories. "From the insurer's standpoint," he says, "credit information serves as an indicator as to how well a person manages financial risk. A person who keeps his finances in order tends to keep his or her home in good shape, and probably drives more safely as well." This translates into fewer claims that the insurance company has to pay, which means that these consumers cost the insurance company less. "In addition, homeowners insurance losses for people with the worst credit tend to run much higher than those of consumers with the best insurance credit scores."

Lynn Knauf, director of personal likes for the Property Casualty Insurers Association of America in Des Plaines, IL, points out that credit-based insurance scores are objective and "blind." She feels that it is important to note that these insurance scores do not factor in a consumer's nationality, marital status, location, income, or race.

Chubb is one company that does not use credit scores when deciding about underwriting for homeowners insurance policies for its customers. However, according to Chubb spokesman Mark Schussel, his company has "other ways to determine the acceptability of a risk." According to Mr. Schussel, Chub goes "beyond what's contained in the insurance application."

Mr. Schussel followed with an example, "The application doesn't provide enough detailed information about the type of materials and craftsmanship used in a home, as well as specific exposures a home faces and what steps a consumer has taken to mitigate those exposures. That's why we visit many of the homes that we insure."

In closing, consider a final thought on credit scores from Paul Hollie, who is the spokesman for Safeco Insurance. Mr. Hollie states, "Personal credit reports are available from several organizations, including Equifax, TransUnion, and Experian. Reviewing your credit and cleaning up inaccuracies should be an annual ritual, no different than checking on your personal retirement accounts or checking your fire alarm batteries." By checking your credit score annually, you will be able to protect yourself from potential errors. This means that when you apply for your next insurance policy, you will be considered a good risk based on credit-based insurance scores. As a result, you will have the best possible rates for your situation offered to you.

If you check your credit score and find that it is less than ideal, you can start taking steps to improve your credit as quickly as possible. When you have made significant changes to your credit score, start shopping around for a new insurance policy. You just might find that you will be offered a much lower rate based on your newly improved credit score. To improve your credit score, start paying your bills in full and on time each and every month. Also, if there are any errors on your score, you need to address these. Often you can raise your score significantly just by having errors removed from the report. In the world of homeowner's insurance, every point you raise your credit score can make a difference on the cost of your policy.