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How and why Does Credit Scores Affect Home Insurance?

by Anita Johnston on 10/21/2010 08:35 PM

Today, all insurance companies are now looking at a person’s credit history before issuing home insurance. Honestly, this should not have anything to do with a person’s ability to have protection on their homes, but the new standard is still there.

The Insurance Information Institute explained that the credit information is used by home insurance companies to create a type of formula that allows them to give each person an insurance risk score. This score is supposed to determine the likelihood of a person filing an insurance claim.

The categories that home insurance companies will look at include to determine your insurance risk score include your payment history, amount of credit you owe, the time you have had the credit, new credit accounts, and they type of credit you have. The payment history is 35% of the score, the amount of credit you owe is 30%, the time you have had the credit is 15%, the new credit is 10% and the types of credit is 10% or close to these percentages.

A closer look
Your payment history will include how you have paid your bills in the past, late, on time, if there are any collections, bankruptcies, etc... Amount of credit or money owed is what your balances are on the loans or credit cards. The time you have had the credit shows the length of each loan or credit card. New credit will include any and all new credit you have established as well as all inquiries on your credit. Types of credit of course are loans, credit cards, etc.

Of course, in order to obtain a loan, your credit is also checked and the same categories are used, only with insurance companies, the weight that is put on one category can be quite different from from lending company.

An insurance company is looking for stability and reliability. Insurance companies want customers that are reliable and have a pattern of practicality with money matters.

No one knows the exact formula being used to determine a person's insurance risk score, but the better your credit rating the better you will score. Insurance rates will be lower for a person that has an excellent insurance risk score whereas someone with an unreliable history will have to pay more for the same insurance.

A study at the Bureau of Business Research at the University of Texas released in 2003 shows a strong relationship between credit history and filing an insurance claim, thus the reason so many insurance companies are now searching for a formula that works to determine if a person is a bad insurance risk.

Last updated on 10/21/2010 08:37 PM