The rising cost of homeowner’s insurance is somewhat out of our control, as it reflects the rising cost of claims (and future risk of claims) caused by extreme weather. But in most states, insurers can use something that is in your control to help them decide what homeowner’s insurance premium to charge you.
Insurance credit scores are a legal tool insurance companies can use to set home insurance premiums. They are a separate, but similar version of a regular credit score. Only California, Maryland, and Massachusetts prohibit the use of insurance credit scores for setting homeowner policy rates. In every other state, if you own a home, there’s a good chance your premium reflects your insurance credit rating.
A recent investigation by the New York Times reported that homeowners with an insurance score in the range of 580-669 (850 is the best) often must pay a premium that is 1.5x to 2x the premium charged to someone with a score of 800 or higher. To be clear, the investigation compares apples to apples: same value house, same age of house, same type of policy. But wildly different insurance premiums based on the insurance score.
For insurance credit scores, landing in the 580-669 range is considered a “fair” score, while anything above 800 is “good.” You know I always suggest that you do your very best to build the strongest credit score (and thus, insurance score) possible, as it affects so many parts of your financial life, from borrowing rates to credit card deals. The impact on your homeowner’s policy is just another reason to do what you can to build a solid score.
Unless you live in one of the three states that ban this practice, I bet you’re motivated more than ever to do what you can to raise a score that is below 800. Let’s focus on the two big wins:
- Pay your credit card bill on time. Automate it. Even if it’s not for the full amount, you must pay on time. Your “on-time” payment is the single biggest factor in determining credit scores.
- Try to reduce how much of your total outstanding credit card limits you are using. Add up the credit card limit for all your cards. Then aim to keep your monthly combined balance below 30% of that amount. The lower the better. This is referred to as your credit utilization rate. The algorithm that determines all your credit scores likes to see this as low as possible. It is considered a signal that you’re not financially stressed.
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