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The Most Effective Method for Lowering Home Insurance PremiumsMarch 7, 2017
Time and again, we’ve stressed the importance of credit scores, and why it’s important for you to keep yours in good shape. I’m sure you already know that your credit score affects the rate that you’ll have to pay on your home loan or car loan, and also whether you’ll qualify for it in the first place. But did you know that your credit health impacts the amount of premium that you’ll be asked to fork out for home insurance as well?
It’s true – based on a numerical rating, called your home insurance score, insurance companies calculate the probability that you’ll file a claim that may result in future losses to them. The lower your home insurance score, the greater the amount of premium that you’ll be asked to pay.
Your home insurance score may be calculated by any of the three major credit bureaus, TransUnion, Experian and Equifax; by another company’s proprietary formula; or, by the insurance company itself, using their own models and data. Some of the factors used to calculate your home insurance score are similar to those used for determining your credit score – for example, the age of your oldest account (the older the better) and whether you have any derogatory marks, such as bankruptcy, foreclosure and debt collections, on your credit report.
Other variables that are taken into consideration are account status (whether you pay your accounts on time and in full); total amount past due, i.e., the total amount of debt that you’re late on paying back; and, the number of hard inquiries on your report. Your credit card utilization and total card limits also play an important role – those individuals with a high utilization ratio are perceived to pose greater risks, while those with greater total credit card limits are considered to be more sound.
Other than the above, proximity of the house to a fire hydrant or fire station, and the presence of a good alarm system, are equally crucial for determining the amount of home insurance premium. Living in a low-crime area or one that is not susceptible to natural disasters like earthquakes or floods is beneficial for low premiums. These factors don’t appear on your credit report and are not really used to calculate your score, but they are an indispensable part of the process to arrive at a premium.
Nevertheless, the importance of the information that does appear on your credit report cannot be denied. Home insurance scores use the correlation between credit information and insurance losses to calculate risky behavior and potential for losses. In other words, by evaluating the amount of risky behavior consumers engage in with their credit, insurance companies are able to estimate the likelihood that they’ll file a costly insurance claim. Just as potential lenders want to see a credit report that reflects responsible decision-making and stability, insurance companies too want to feel reassured that they won’t have to shoulder huge amounts of losses.
This is why it’s essential for you pay substantial attention to your credit health. A good credit score will eventually result in a good home insurance score and reduce the likelihood that you’ll have to pay high insurance premiums when you buy a new home, or even while renewing a current home insurance policy. If you haven’t already gotten into the habit of monitoring your credit score, please do so immediately - and see the wonderful results for yourself.
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