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Having a poor credit score won't necessarily disqualify you from getting homeowners insurance. But poor credit likely means a lower credit-based insurance score, which can result in you being charged a higher rate for your policy.
If you're applying for a homeowners insurance policy and aren't sure how your bad credit may impact you, here's what you need to know.
Does Your Credit Score Affect Homeowners Insurance?
When you apply for homeowners or auto insurance, you can generally expect the insurance company to check your credit report. They'll typically also use a credit-based insurance score based on your credit history to determine the likelihood that you'll file a claim.
According to the National Association of Insurance Commissioners, 85% of homeowners insurance companies use credit-based insurance scores in states where it's legally allowed.
This means that if you have a relatively low credit score, it could potentially lead to higher premiums on your policy. That said, your credit history isn't the only factor insurance companies consider when determining rates. Other factors include:
- Coverage amount
- Deductible amount
- Location of the covered property
- Local crime statistics
- Safeguards, including smoke detectors and home security systems
- Construction type and materials
- Condition and age of the home
- Your previous claims history
As you search for a homeowners insurance policy, take time to shop around and compare quotes from multiple insurers before you settle on one. Also, keep in mind that many insurance companies offer discounts on bundled homeowners and auto insurance policies.
That won't necessarily ensure the lowest price, but it can help as you look for the policy with the best value.
Can You Get Homeowners Insurance With a Bad Credit-Based Insurance Score?
Credit-based insurance scores are like traditional credit scores, but with a couple of differences in how they weigh certain factors of your credit history. For example, here's how the FICO® Insurance Score compares with the base FICO® Score☉ that you usually see:
| FICO® Insurance Score | FICO® Score | |
|---|---|---|
| Payment history | 40% | 35% |
| How much you owe | 30% | 30% |
| Length of credit history | 15% | 15% |
| Recent inquiries | 10% | 10% |
| Credit mix | 5% | 10% |
Insurers may also use the LexisNexis Attract Score, which considers many of the same factors. Insurance companies calculate these scores based on the information in your credit report. Those with low credit-based insurance scores are statistically more likely to file a claim than someone with a high score.
That factor alone won't necessarily result in a denial, though. Instead, it means a policyholder with bad credit will typically pay more for coverage than they would have with a higher credit-based insurance score.
If you have a poor credit-based insurance score as well as issues with some of the other factors that insurance companies consider, it is possible you'll have a tough time getting approved.
How to Improve Your Credit to Qualify for Better Home Insurance Rates
While your credit scores and your credit-based insurance scores are calculated differently, they both are based on the information found in your credit report.
As such, improving your regular credit score can result in increasing your insurance score. Here are some ways you can work on improving your credit score and credit-based insurance score at the same time:
- Focus on payment history. Your responsibility with managing your payments is crucial for each score type, so it's important to make it a priority. Set a goal to make all your debt payments on time. It might be helpful to set up automatic payments on your accounts. If you have any past-due accounts, work to get caught up as quickly as possible.
- Reduce your credit card debt. Having a balance on your credit card that's high relative to its credit limit can hurt your scores. The lower your credit utilization ratio—your balance divided by your limit—the better it is for your credit score.
- Gain authorized user status. If you have a loved one who has a credit card with a positive history, consider asking if you can be added to the account as an authorized user. Once you're on the account, its entire history will be added to your credit reports, which can help improve your scores.
- Keep old accounts. If you have old credit cards you no longer use, it's often wise to keep them open instead of closing them. Their positive history can continue to help maintain good credit because it will contribute to the length of your credit history and help you keep your overall credit utilization lower.
- Avoid new credit unless necessary. Virtually every time you apply for credit, the lender will run a hard inquiry on your credit reports, which can knock a few points off your credit score. And whenever you open a new credit account, it reduces your length of credit history, which impacts your length of history. Unless you absolutely need to take on new debt, it's usually best to avoid applying for both loans and credit cards.
- Dispute inaccurate credit information. Check your credit reports to make sure all the information found in them is accurate and up to date. If you find what you believe to be incorrect or fraudulent information, you can dispute it with the credit bureaus, who will revise or remove it if they can verify your claim.
As you take these and other steps to improve your credit score, you'll have a better chance of qualifying for better insurance rates, as well as more favorable rates when you apply for credit. Continue to check your credit score regularly to track your progress, and watch out for anything new that might damage your scores.
Once you've had a chance to increase your credit score, ask your insurance company upon renewal to reevaluate your situation to see if you can get a lower rate. If you don't want to wait, you can also request quotes from other insurers and compare them to what you're paying now, to see if you can save.
Continue to Monitor Your Credit for Financial Success
Building your credit history can help you qualify for better insurance rates, but avoid the urge to stop focusing on your credit score once you've accomplished that goal. With Experian's free credit monitoring service, you'll get free access not only to your FICO® Score powered by Experian data, but also to your Experian credit report, which is updated every day.
You'll also get real-time alerts whenever there are changes to your credit report, such as new inquiries, new accounts and changes to your personal information.
As you continue to monitor your credit, you'll be able to spot potential issues and resolve them quickly. You'll also be able to see exactly how actions you take with your credit affect your scores. As you maintain a strong credit history, you'll continue to benefit from lower insurance rates, as well as interest rates.