Does Your
Credit Score Effect Your Homeowners Insurance Cost?
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Posted: 26 Sep 2013 04:00 AM
PDT
Our guest blogger for
today is Carrie Van Brunt-Wiley, Editor of the HomeInsurance.com blog. The HomeInsurance.com
blog provides tips for consumers on a wide variety of topics ranging from
home maintenance to insurance shopping. - The
KCM Crew
Your credit score and your
insurance payments- what’s the connection?
You’re likely not surprised
when your loan officer asks for your social security number- a thorough
credit check is standard when applying for a loan. However, many consumers
are caught off-guard when a homeowners insurance agent asks for their social
security number. It’s widely debated, but quite commonly practiced- for
an insurance carrier to use a customer’s credit score to determine their
insurance premiums.
What does your credit
score really mean to your potential insurance carrier?
While many businesses will
use a consumer’s credit score to determine eligibility for a line of credit
or to discern whether a deposit should be held for an advance of services,
insurance companies actually perform a different type of credit inquiry that
they use for a very different reason.
A “Soft” Credit Check
First and foremost, it’s
important to know that when an insurance company runs your credit they are
actually performing what is called a “soft” credit check which accesses only
your credit score and is not reflected as an inquiry on your credit report. As
you probably can surmise, this is different from a “hard” credit check that a
lender, for example, may run which does show up on your credit report as an
inquiry. Since credit inquiries from “hard” credit checks can hurt your
overall score it’s good to limit these types of credit checks when shopping
for a mortgage, for example. However, since insurance carriers only perform a
“soft” credit check you can feel free to shop for multiple insurance quotes
without worrying about hurting your credit rating.
What they use it for
Here’s where a lot of
confusion, and sometimes even frustration, can set in from a consumer’s
perspective. Once an insurance company has your credit score, they use it
(along with many other factors about you and your home, car, etc.) to assign
you an “insurance score”. This insurance score reflects your potential risk
to the insurer.
The insurance carrier then
takes your risk potential and calculates your premiums. The more risk you
pose, the higher your premiums will most likely be. This is where the real
question comes in:
What does poor credit
history have to do with my potential to file a claim?
If you’re asking this
question, you’re not alone.
There is much debate over the
use of credit scoring as a way to determine risk, and therefore assign rates
to insurance consumers. However, insurance companies defend the practice
saying that studies have shown a direct correlation between a person’s credit
score and their likelihood to file a claim. Therefore, consumers with a lower
credit score often pay higher rates for insurance.
Whether you agree with the
practice or not, qualifying for better insurance premiums is just one other
way that you can save money by keeping a good credit rating.
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