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homeA recent insurance survey determined that homeowners with poor credit scores can pay up to 91 percent more for insurance than those with excellent credit. Even an average credit score can increase your homeowner policy premium by up to 29%. Consumers with poor credit pay at least twice as much compared to those with excellent credit in 37 states. West Virginia was the highest in the nation at a 208% increase followed by Virginia (185%), Washington D.C. (182%). The greatest differences between average and excellent credit were observed in Montana (65%), Washington D.C. (60%) and Arizona (55%).

Only three states, California, Massachusetts and Maryland prohibit insurance companies from using credit to calculate homeowners insurance premiums. In Florida, where credit scoring is legal, the survey found that the credit score does not have much effect on price. Due to extreme wind exposures, Florida homeowners already pay the nation’s highest average homeowners rates $1,933 vs $978) and credit appears to be of less concern in that market.

Many consumers are not even aware that their credit score plays a role in calculating their premium. Insurance credit scores, unlike traditional credit scores used by financial institutions, are not disclosed to the consumer. According to FICO, about 95% of auto insurer and 85% of homeowners insurers used credit based scoring where allowed. A 1990s survey of insurance companies did show a statistical correlation between a person’s credit score and his likelihood of filing a claim. The weight given to the credit score rating factor does vary from company to company.

The credit based insurance report is created using data collected by credit bureaus such as Equifax or TransUnion. About 35% of the score will hinge on timely payment of debts. The data report will generally include:

• Outstanding debt
• Length of credit history
• Late payments
• Collections
• Bankruptcies
• New applications for credit

Since it’s inception, credit based insurance scoring has come under attacked by consumer groups maintaining that it hurts low to moderate income earners with typically lower scores. While admitting that there may be a relevant connection between credit and risk they maintain that the practice should be universally banned because it punishes people for factor beyond their control.

To improve your insurance credit score you must also raise your regular score. You can do this by:

• Paying all of your installment loans and credit card debts on time
• Do not open any new accounts unless absolutely necessary
• Keep credit card balances as low as possible, ideally about 25% of the available credit limit.

Brent Allen
Allen Financial Insurance Group