Here’s Why People With Poor Credit Scores Pay 114% More for Home Insurance

Here’s Why People With Poor Credit Scores Pay 114% More for Home Insurance
jeffbergen

Fires and lightning and hail, oh my!

If you own a home, you probably have insurance to protect it from threats like these, and from other scary stuff like windstorms, vandalism, explosions, cars running off the road, or airplanes falling from the sky.

And if you have a mortgage on your home, you have no choice here: You’re required to have homeowners insurance.

So here’s one more reason to maintain a decent credit score.

Your credit history is having more and more of an impact on your homeowners insurance rates, according to a new analysis.

If your credit rating is poor, your insurance premium is more than double the rate a homeowner with excellent credit is paying, according to the InsuranceQuotes.com report.

In other words, here’s another way the world isn’t fair.

If you’re broke and your credit rating stinks, you get to pay twice as much as someone who’s NOT broke. Yes, this is how the financial world works.

“Many consumers aren’t even aware that, in most states, credit plays a significant role in determining how much you pay for home insurance,” says Laura Adams, a senior insurance analyst for InsuranceQuotes. “So even if you don’t plan on using credit to borrow money, it still affects your finances.”

Previous studies had come to the same conclusion. The new development here is, the penalty for having lousy credit is getting worse and worse.

People with “fair” credit paid an average of 36% more for homeowners insurance in 2016 than people with excellent credit, according to the study. That’s up from 32% in 2015 and 29% in 2014.

People with poor credit paid 114% more in insurance premiums -- up from 100% more in 2015 and 91% in 2014.

Why does your credit rating have an effect on the price of your homeowners policy?

David Snyder, vice president for policy development and research with the Property Casualty Insurers Association of America, told The New York Times that a homeowner's credit history helped predict the likelihood of filing a claim. Insurers are allowed to base rates on factors that affect risk, he says, “and this is simply one of those.”

What Can You Do?

First of all, if you need homeowners or rental insurance, be sure to shop around.

Insurance companies are notorious for wildly varying rates, so call around and ask for the same coverage from each company to see which one offers the best deal.  

Consider bundling your car and home insurance policies to get a better deal.

More importantly, take concrete steps to improve your credit score.

How exactly do you do that? Here are three ways to get started:

1. Figure Out What You’re Dealing With

Map out exactly what kind of debt you have.

For example, which companies do you owe money to? Are any of your debts in collections? What are your minimum monthly payments on each credit card or loan?

An easy way to do this is to sign up with a free service like Credit Sesame. This tool shows your balance on any unpaid bills, credit cards or loans. It also offers tips on reducing your debt and raising your credit score.

2. Consolidate Your Debt

Once you fall behind, you may find yourself getting crushed by credit card interest rates north of 20%. You’ll never catch up that way. You’re spending so much on interest, you’ll never pay off your balances.

If you’re financially treading water like this, it might be worth consolidating and refinancing your debt.

By refinancing an existing loan, you’re taking out a totally new loan, which comes with new terms and (ideally) a lower interest rate. By consolidating your existing loans, you lump all your debt into one big payment, so you’re only making one payment and dealing with one interest rate per month.

Make sense but don’t know where to start? Credible is an online marketplace that offers consumers personalized loan offers. Think of it like Zillow -- but for personal loans.

Rates start at 5.99%, and you can check yours by entering a loan amount here ($500 to $40,000) and comparing your personalized options in under 90 seconds.

3. Protect Your Identity

What if you work hard to pay down all your debt and you’re totally responsible with your credit going forward -- only to take a hit because of identity theft?

We know you don’t want to risk all your hard work.

A free service like TrueIdentity helps you avoid this situation by keeping a watchful eye on your finances. It sends alerts by email, phone or text if someone tries to apply for credit in your name.

If you improve your credit score, you won’t have to pay as much to insure your home against fires and lightning and hail.

Not to mention those pesky airplanes falling from the sky.

Disclosure: This post contains affiliate links. May we all be a bit richer today.

Mike Brassfield (mike@thepennyhoarder.com) is a senior writer at The Penny Hoarder. Because he lives in Florida, he has homeowners insurance, flood insurance and windstorm insurance.