Want to know a (mostly) secret way to lower your home insurance premiums? One that could also reduce your mortgage, and even affect how much you pay for your car and car insurance?
It’s really not a secret, nor is it magic. It’s something anyone can do: maintaining a good credit score.
Your credit history affects more than your credit
You likely know and understand how your credit history figures into the decision when you apply for a credit card or try to open an account at a clothing or furniture store. The credit card company or store wants to make sure you have a history of paying your bills on time.
And you probably know car dealers run your credit when you want to buy a car. What you might not know is that your credit history plays into the interest rate you’re offered — which affects the total payback on your loan.
The same applies to your home loan. Your credit will affect the interest rate for your mortgage, and the difference in that interest rate over a 30-year loan period can add up to tens of thousands of dollars.
Insurance companies have a different reason for examining your credit report. They don’t look at it to calculate your risk of paying your premium — you always pay in advance of coverage anyway. What they do use your score for is to determine your risk of filing a claim.
Yes, that’s right. Insurance companies have, since the early 1990s, used your credit reports to predict the possibility that homeowners will have a fire, suffer a break-in, have a tree fall on the roof, or be the victim of some other covered peril. They do the same for auto insurance policyholders.
Only three states — California, Hawaii and Massachusetts — ban the use of credit scores in setting insurance premiums.
What’s the correlation?
Insurance companies started using credit histories to determine premiums because studies have shown that those with higher credit scores file fewer claims. Insurance companies believed that using the credit-based scores would help get more accurate and fair rates for policyholders — in fact, the industry says it actually results in lower premiums for most policyholders.
However, many consumer groups criticize the practice because they believe it penalizes those that have previously run into medical emergencies and financial difficulties, and unfavorably affects low-income and minority customers.
How much does a credit score affect premiums? A study by the Consumer Federation of America found that one large provider charged poor-credit customers about 127 percent more than policyholders with the best credit scores.
What can you do?
There’s no quick fix for a bad credit score. It takes time and discipline to pay bills down while avoiding new debt. But given the potential for saving on your mortgage and your insurance premiums — as well as on car and other large purchases — it’s worth the effort.
One step you can take immediately is to check your credit report and correct errors that could reflect badly on your score.
Take charge of your finances by building a good credit history and improving your credit score. You can save a bundle — now and in the future.