In many states, the lower your credit score, the higher your homeowners insurance premium will be. While the two factors may seem unrelated, home insurance companies use data to justify this rating process. Studies have shown that policyholders with lower credit scores tend to file more claims than those with higher credit scores, making individuals with poor credit riskier to insure. If you live in any other U.S. state outside of California, Maryland or Massachusetts, where credit is banned as a home insurance rating factor, you’ll want to understand how credit plays a role in your premium and your coverage options.
- Homeowners with lower credit scores tend to file more homeowners insurance claims than those with higher credit scores, resulting in higher premiums.
- USAA and ASI Progressive are two of the cheapest home insurance providers for people with poor credit, based on Bankrate’s analysis.
- California, Maryland and Massachusetts ban the use of credit as a rating factor.
Why does having bad credit negatively affect your premiums?
Insurance companies are in the business of risk, which means everyone is evaluated on the potential amount they pose to the carrier. Credit histories have long been used as one indicator of the amount of risk a homeowner presents. Specifically, your credit score may be used to determine how likely you are to:
- File claims: Carriers have found a connection between lower credit scores and a higher chance of filing a homeowners insurance claim, which can make someone with a lower credit score riskier to insure.
- Maintain your property: Insurance carriers often consider someone with a higher credit score more likely to regularly maintain their property. Therefore, the condition of the home is likely to be better, which can lessen the risk of claims.
- Pay bills on time: Although many home insurance policies are paid from a mortgage escrow account, some homeowners pay their premiums themselves. Policyholders with higher credit scores are typically viewed as being more likely to pay on time.
Credit histories are not used as a rating factor in all states. The following states ban the use of credit when rating home insurance policies, meaning your credit tier cannot affect how much you pay for homeowners insurance:
- California
- Maryland
- Massachusetts
How does credit affect your insurance rates?
Generally, the higher your credit rating, the lower your insurance premium will be. Your homeowners insurance premiums are calculated based on numerous factors such as the age and condition of your home, deductible amount, local crime history and claims history.
Your credit score — or credit-based insurance score — is not the only rating factor, although it can be an important one. Our research revealed that policyholders with poor credit histories pay over 77% more for home insurance on average than policyholders with excellent credit. The premiums in the table below illustrate the average annual home insurance premium for $250,000 in dwelling coverage for each of the four credit rating tiers.
Keep in mind that your credit-based insurance score is not the same as your actual credit score. Your credit score is a measure of how likely you are to default on a loan, while credit-based insurance scores are a measure of how likely you are to file a claim. Additionally, each insurance company has its own formulation for displaying your credit-based insurance score. Companies may use a mix of numbers and letters, for example, to further differentiate your credit-based insurance score from your credit score, and to protect your privacy.
| Poor credit | Average credit | Good credit | Excellent credit | |
|---|---|---|---|---|
| Average annual premium | $2,180 | $1,400 | $1,383 | $1,232 |
However, the impact that your credit report has on rates varies among insurance carriers. The table below shows the difference in premiums for those with good and poor credit across seven home insurance companies.
| Insurance company | Average annual premium with good credit for $250K dwelling coverage | Average annual premium with poor credit for $250K dwelling coverage | Difference in premium |
|---|---|---|---|
| State Farm | $1,360 | $2,060 | $700 |
| ASI Progressive | $1,061 | $1,216 | $155 |
| Allstate | $1,300 | $1,672 | $372 |
| USAA | $978 | $1,353 | $357 |
| Farmers | $1,617 | $2,694 | $1,077 |
| American Family | $1,105 | $1,597 | $492 |
| Travelers | $1,202 | $1,679 | $477 |
The cheapest providers on our list for homeowners with both poor and good credit are Progressive and USAA. However, keep in mind that USAA only offers coverage to members of the U.S. military, veterans and their eligible family members.
Can you get cheap homeowners insurance with bad credit?
There are still ways that you might be able to find cheap homeowners insurance with poor credit. If you have a low credit score and are shopping for home insurance, you might want to:
- Comparison shop: Getting quotes from several home insurance carriers is one of the most effective ways to find the cheapest homeowners insurance rates for your situation. Comparison shopping allows you to compare each company’s premium, coverage options, discounts, policy features and third-party scores.
- Review available discounts: Like auto insurance, homeowners insurance policies are eligible for discounts on premiums. Ask your carrier about reducing your premiums by bundling your policies and installing safety features like security systems, smoke and fire alarms to reduce your cost.
- Improve your credit score: As your credit score increases, you might see your home insurance premiums decrease. Just remember that your credit score won’t impact your rates if you live in California, Maryland or Massachusetts.
Speaking with a licensed insurance agent might help you decide what coverage options and discounts are right for your circumstances.
How to improve your credit score for better rates
While repairing bad credit may seem daunting, there are several tactics you can use to potentially improve your credit score. You might be able to improve your credit score by:
- Making on-time payments: Your history of making payments on time is one of the most significant portions of your credit score calculation. Late payments can negatively impact your report. Usually, the longer you make on-time payments consistently, the better it is for your score.
- Keeping credit utilization low: Your credit utilization is the amount of credit you use versus the amount you have available to you. Many financial experts recommend using less than 30% of available credit to you. You can lower your utilization by paying down credit card debt and other balances and maintaining a high available credit limit.
- Checking your report for errors: Regularly monitoring your credit report and score can help make sure the most accurate information is reported. You are entitled to three free credit reports each year and if you find a mistake, you can take steps to get the information corrected.
- Reduce hard credit checks: There are two types of credit checks: hard checks and soft checks. Hard checks occur when you apply for a new line of credit, like taking out credit cards or applying for loans. Hard checks have the potential to lower your credit rating. Soft checks, however, happen when your credit is simply inquired into, like when you get car insurance quotes. Soft checks should not affect your credit rating. Reducing hard checks can help you maintain and potentially improve your credit score.
Frequently asked questions
Methodology
Bankrate utilizes Quadrant Information Services to analyze 2022 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on 40-year-old male and female homeowners with a clean claim history and the following coverage limits:
- Coverage A, Dwelling: $250,000
- Coverage B, Other Structures: $25,000
- Coverage C, Personal Property: $125,000
- Coverage D, Loss of Use: $50,000
- Coverage E, Liability: $300,000
- Coverage F, Medical Payments: $1,000
The homeowners also have a $1,000 deductible and a separate wind and hail deductible (if required).
These are sample rates and should be used for comparative purposes only. Your quotes will differ.
Credit: Rates were calculated based on the following insurance credit tiers assigned to our homeowners: “poor, average, good (base), and excellent.” Insurance credit tiers factor in your official credit scores but are not dependent on that variable alone. The following states do not allow credit to be a factor in determining home insurance rates: California, Maryland and Massachusetts.
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