Why People with Poor Credit Ratings Pay More for Home Insurance?
Everyone knows that having a poor, or even below average, credit rating can cost a lot when it comes to getting a mortgage. This is because banks are taking a bigger risk than with people who have an excellent rating. However, what many people don’t know is that having a poor credit score can also cost you thousands when it comes to home insurance.
How Does It Affect Home Insurance Prices?
How much more do people with poor credit ratings have to pay for home insurance compared to people with excellent scores? Well, according to some reports it stands at 114%, and some others put it at even more than that. In Oklahoma for instance, it can be up to as much as 248%. That being said, though, the 114% seems to be an average among states. But why is that?
Many people, especially those who are just taking out home insurance, seem not to know why their home insurance is so high, or why their credit evaluation is the way it is. These two are fundamentally tied to each other, as many institutions use your credit rating as the best way to determine how much to charge you for home insurance. They also use it to decide how much interest to charge you for loans and other things that hinge on credit scores.
How Do Banks Decide on Your Credit Rating?
It is based on many factors, such as if you’ve paid back loans you’ve taken out in the past, and if you’ve ever been late with repayments etc. Defaulting on a 5-year loan is also a significant factor.
Essentially, you’re given a series of points for paying back your loans on time, but points are deducted for defaulting etc. How often you use your credit card is also a big factor when it comes to adding or subtracting points. All of this is then compared to a national average to see how much of a risk you are for a loan.
How Does This Score Affect My Insurance Rate?
That might be a bit murky, but it boils down to the fact that home insurers use your credit score to estimate the likelihood of how often you might file a home insurance claim. They also use it to try to determine how expensive these claims might be.
Essentially, your credit score is just a rating of risk for financial institutions. That’s why people with higher scores pay less on average than others; they’re regarded as being less of a risk compared to those with poor credit ratings. Is it possible to check your rating before applying for a mortgage or home insurance? Yes and no.
While you can’t actually see it, most American credit card lenders give you access to your monthly FICO score. While this isn’t anything like your credit rating and doesn’t involve home insurance, it does let you see what’s making your credit score go up or down. This can be a major benefit when it comes improving your number. This, in turn, can make you a more appealing person to lend to or give home insurance too.
How Can I Improve My Credit Rating?
If you are focused on using what can improve your FICO score, and steer away from the factors that negatively affect it, then your overall FICO score will go up. According to research, doing this means that as your FICO score improves, so will your credit score.
Regarding the cost of home insurance, this means that, should you do everything the right way, prices will start to drop as your credit ratings improve. While it doesn’t affect your current rate, when you need to renew your home insurance or decide to take out other insurance, you’ll end up seeing a significant price reduction.
At the very least, your home insurance will drop from the 114% average discussed earlier. How much it will drop depends entirely on how much work you put into improving your FICO score and credit rating, as well as on your particular home insurance provider. That being said, though, any reduction in rates is a definite improvement, and you could end up paying less and less each time you renew your home insurance. So, it’s smart to start checking that FICO scores on your bank statement as soon as possible.
Other Ways to Lowering Rates
Insurance rates are indeed being more critical than ever, and credit score plays a crucial role by affecting that. Necessary step like consolidating debt that indirectly helps improving poor credit scores, shop around and inquiring for different option available for insurance deal can help.
Sometimes poor credit can be solely due to the identity theft hit. You can use a free service to protect your identity that will also keep your alarm regarding issues of your financial profile. Being financially responsible will one day make you eligible to get standard rates and get rid of annoying ratings. It may sound easy to some people, but these are long-term step to get rid of financial woes permanently.