How To Improve Home Insurance Rates Through Higher Credit Scores

Homeowners insurance is crucial to protect the contents within a property and reduce the financial risk of unforeseen damage and disasters. However, consumers with low credit scores may find themselves paying more for necessary coverage than those with a better credit history.

With the majority of home insurers using credit scores to come up with insurance quotes, consumers could increase their credit scores to get the best rates.

Link between low credit scores and insurance rates

Credit score provider FICO revealed 85 percent of home insurance companies look into credit scores during their underwriting process. Credit-based insurance scores can only be taken into account in states where they are not restricted, such as Maryland, The Washington Post reported.

Firms have used credit-based insurance scores since the early 1990s, according to the National Association of Insurance Commissioners. The association said credit-based insurance scores serve as a way to determine the likelihood consumers will incur an insurance loss depending on their credit history.

The link between low credit scores and a high insurance risk could result in increased homeowners insurance rates.

"Credit is the best predictor of your making a claim," said David Vidmar, a State Farm insurance agent, according to the Post. "If you don't have money to pay your bills, how likely are you to pay your deductible or file small claims?"

The factors that insurance companies will use to calculate credit-based insurance scores include payment history, credit utilization, new credit and credit mix, according to FICO.

If consumers believe their low credit scores could affect their insurance quotes, they could take the following steps to clean up their credit history:

Repair credit and minimize errors

While credit reporting companies are diligent about recording payment history accurately, consumers could find several mistakes on their credit report. These may include payments marked as late or items in collection. To avoid having these blemishes impact their credit history - and subsequently, insurance rates - contact the three credit reporting bureaus and challenge these errors, the U.S. Federal Trade Commission recommended.

Ensure accounts are in good standing

Although consumers might have some negative marks on their credit report, they could minimize their effects by having all other accounts in good standing. Be sure to make payments on time and track funds in all bank accounts to avoid overcharging and incurring fines.

CoverHound provides real-time quotes for homeowners insurance in the U.S.