Does Your Credit Score Affect Your Homeowners Insurance?

Your credit score plays an important role in the homeowners insurance premium you pay once you purchase a home. That’s because insurance companies use information in your credit report to calculate an insurance score.

Similar to a credit score, insurance companies use credit-based insurance scores to help them predict losses by determining which consumers are more likely to file claims. An insurance company assigns an insurance score to any consumer who applies for an insurance policy, and the more favorable your insurance score, the more favorable your insurance premium likely will be. (Not all insurance companies use credit-based insurance scores, and some states prohibit insurers from using them, but they are common.) Also similar to a credit score, an insurance score will consider your outstanding debt levels, the length of your credit history, whether you pay bills on time, your number of credit accounts and your new applications for credit. A long, established credit history, the absence of late payments and collection accounts, low credit balances, and few new credit accounts will lead to a positive insurance score.

Before we dive into the other factors that may affect your homeowners insurance, here’s an overview of what homeowners insurance actually is and how it works.

What Is Homeowners Insurance?

Homeowners insurance is designed to protect homeowners against damages to their home or its contents (aka the homeowners’ possessions). It provides financial protection, which can help you rebuild or repair your home, and typically covers scenarios in which the damage might occur, such as fire, theft, vandalism or lightning. Hurricanes and floods are often excluded, so be sure to read the fine print of any policy you consider.

What Is the Purpose of Homeowners Insurance?

Specifically, homeowners insurance helps residents pay to repair or rebuild specific aspects of their home whenever they’re damaged. A variety of standard homeowners insurance policies exist, but generally they offer coverage for things such as structures like sheds, fences and garages, as well as plumbing, heating and air conditioning. Personal property coverage is just what it sounds like, covering furniture, clothes and sporting equipment, while liability insurance can help you cover costs related to an accident that occurs in your home or on your property.

Other Factors Affecting Your Homeowners Insurance Rates

Insurers also consider your prior insurance loss history, the construction type of your home, the distance of your home from fire hydrants and fire stations, and whether or not you have smoke detectors, fire alarms and a security alarm in your home. Other factors vary from company to company.

Insurance companies may offer discounts on your premium if you and your family members are all non-smokers, if you are retired, or if you have multiple insurance policies with a particular company. Be sure to ask about these discounts when you apply for homeowners insurance coverage and review all the terms.

Keep Your Credit Score at Its Best

Since your credit is such a strong factor in determining your insurance premiums, it’s a good idea to check your credit report and correct any errors before applying for an insurance policy. You can access your free credit reports on AnnualCreditReport.com and view two of your credit scores on Credit.com. Remember, making payments on time, keeping debt levels low and limiting any hard inquiries into your credit until your score can handle them will help pave the way to better credit over the long run.