Often without being aware, many policyholders could be paying more for their homeowners insurance than their neighbors, even if both properties maintain identical coverage with the same insurance carrier. How could this be true, you might ask? A recent study reports that homeowners with poor credit typically pay 91% more for homeowners’ insurance than people with excellent credit.1 Moreover, many consumers aren’t even aware their credit history is being used this way in most states. According to a 2007 survey conducted by consumer advocacy organization Consumer Federation of America, just 57% of people surveyed were aware their credit score could affect what they pay for home insurance.2
Even worse, policyholders with poor credit pay at least twice as much as those with excellent credit in 37 states and Washington, D.C. West Virginia’s 208% increase is the highest in the nation, followed by Virginia (186%), Ohio (185%) and Washington, D.C. (182%). The greatest differences between excellent and median credit were observed in Montana (65%), Washington, D.C. (60%) and Arizona (55%). Three states prohibit insurers from using credit to calculate homeowner’s insurance premiums: California, Massachusetts and Maryland.3
Florida Not Affected, But Already Highest In Nation
While the study found the credit ratings typically don’t affect homeowner property damage insurance rates in Florida, that surely remains little consolation to homeowners already paying the highest insurance rates in the United States. While insurance companies are technically allowed to consider homeowners’ credit scores in Florida, the report found that credit does not typically affect homeowner insurance premiums. Florida’s hurricane-prone location means that homeowners pay the highest homeowners’ insurance rates in the nation ($1,933 per year, which is almost double the national average of $978, according to the National Association of Insurance Commissioners). Credit appears to be a lesser concern than hurricanes in Florida’s homeowners’ insurance market.4
Texas, Oklahoma, & Nebraska
Most of my homeowner work these days remains in Texas, Oklahoma, and Nebraska, so I wanted to know how credit-based insurance affected premium rates in those states. I was surprised at what I found. For homeowners with poor credit, the following averages apply for premium rates:
(i) Texas: 51% increase
(ii) Nebraska: 41% increase
(iii) Oklahoma: 37% increase5
What Does This Mean For Me?
Wherever you live and whatever you pay, we encourage you to ask your carrier whether they utilize credit-based insurance scores in calculating your premium. If so and your premium payment is adversely affected, it may not be as easy as one would think to improve your score and your premium payment.
What’s tricky about credit-based insurance scores is there’s no standardization in how insurers use them. Where one insurer may weigh your score heavily, another may not consider it to be as important in setting a premium. It’s also important to understand that unlike a traditional credit score (which is used by lenders such as credit card issuers), consumers don’t have access to their credit-based insurance reports, which creates another problem.6
According to Amy Bach, executive director of San Francisco-based nonprofit United Policyholders, insurance companies are very guarded about how they use credit-based insurance scores to set rates, which makes it difficult for consumers to determine how their credit affects what they pay for insurance. "Getting an answer to that question requires some really hard digging," Bach says. "So if you’re comparison-shopping, it’s almost impossible to find an apples-to-apples relationship between your credit score and what you’re going to pay for insurance."7
In Bach’s opinion, credit-based insurance scores are just a proxy for income and that since insurance companies typically prefer wealthier clients, using credit as a rating factor may allow insurers to charge economically disadvantaged consumers more for insurance.8
I typically reserve the last sentence of my blog entries to remind policyholders to read their policies and consult a policyholder professional regarding any and all property damage insurance claims. Since that may not help in the arena this blog entry addresses, this time I will remind policyholders to ask the carrier about their use of credit-based insurance scores. Hopefully, you’ll get a better answer than this study suggests.