If You Have Poor Credit, This Common Household Bill Doubles
NEW YORK -- A lousy credit score penalizes consumers in myriad ways: they're left with limited access to credit, significantly higher interest rates on loans and credit cards, as well as obstacles in getting hired for a job.
There is one other area that homeowners, who usually have higher credit scores than non-homeowners, need to pay special attention to. That would be their homeowner's insurance, which can double in cost due to a low credit score.
According to fresh data from Insurancequotes.com, "homeowners with poor credit pay twice as much for homeowner's insurance as people with excellent credit." Additionally, American homeowners with median credit pay 32 percent more than those with excellent credit.
Insurancequotes.com's senior analyst Laura Adams says the practice of linking homeowner's insurance to consumer credit scores is "controversial," but that's not stopping insurance companies from doing so, as the industry claims there is a strong connection between credit scores and claims. "In most states, insurers are putting more emphasis on credit scores this year," says Adams. "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 company says that homeowners with toxic credit pay double the going rate for homeowners insurance in 38 states and Washington, D.C. "West Virginia's 202% increase is the highest in the nation, followed by D.C. (185%), Ohio (185%) and Montana (179%)," the study reports. Only three U.S. states -- California, Massachusetts and Maryland -- ban insurance companies from tying credit to homeowner's insurance costs, although Florida has set limits on what insurance companies can charge Sunshine State homeowners.
Why the big hit on homeowners by insurance carriers? Carriers use credit scores, because they predict future losses and policy persistency more reliably than other data sources such as previous claims history, says Kevin Haney, an industry analyst with SavvyOnCredit.com, and a long-time insurance industry executive.
"Homeowner claims are large, but infrequent," he says. "This means that carriers have little or no claims data to work for most consumers. Credit information provides a richer data set for the majority of applicants. Credit information also helps predict policy persistency -- which is correlated with financial stability -- a major factor used to price policies."
To rally against onerous home insurance bills, consumers should expand their vision and covering as much ground as possible. "Consumers with poor credit scores can do better on homeowner insurance premiums by shopping around," says Haney. "Carriers differentiate on underwriting, and they evaluate risks differently. Some do not use credit scores at all, while those that do place different weights on the scores."
Consequently, your best bet is to work with a licensed agent in your area specializing in homeowner policies. Haney says you should know which carriers in each local market emphasize credit scores, and which weigh other factors more heavily. That can steer you to the right company.
If you're stuck with low credit and want another avenue to lower homeowner's insurance, try attaching it to your life, auto and other insurance bills.
"Combining your house, car, health, dental, life and other insurances can save you big with some insurance companies offering bundle discounts," notes Arvin Sahakian, vice president at BeSmartee, an online mortgage-services firm. "Also, consider making a payment in bulk for the full insurance term. Companies have been known to offer a discount to clients willing to pay in bulk."
Also, don't miss a chance to let your insurance company know your credit is improving. "Negotiation time arrives when you have been working on improving your credit scores and delinquent payment history," Sahakian adds. "Once you run a report and see a significant improvement in your scores, then it's time to call your insurance rep and send them a copy of your credit report. They will conduct their own research to double check, but that will help you to normalize your homeowner's insurance expense the next time you need to renew your policy."
Bottom-line: Don't let bad credit double the cost of your homeowners insurance. Check around, bundle if you have to, and use improving credit to make your case, and save big bucks in the process.