Does Your Credit Rating Affect Your Home Insurance?

Tuesday, September 18, 2012

Insurance providers are sticklers for statistics. They have to be, after all. Statistics offer them the basis for determining who is high risk versus low in terms of issuing insurance policies and setting premium rates. But is there a direct correlation between your credit rating and your insurance worthiness? Some insurance companies are beginning to think so.

In the case of car insurance, statistics point to a correlation between credit ratings and claims filed. Namely, drivers with low credit ratings tend to file more – and more expensive – claims as compared to drivers with high credit ratings. This information is being used by many insurance providers in determining premium values for auto policies.

What about home insurance? Research in this area is not as clear-cut as for car insurance, but many insurers are assuming that the same type of correlation exists – that individuals who are deemed to be less financially responsible (those with lower credit scores) tend to file more insurance claims. Therefore, just as mortgage lenders calculate the interest rate and terms of your mortgage based on your credit rating, now many insurance companies factor credit scores into home insurance premium calculations. Got a low credit score? Expect to pay more for your homeowner’s insurance.

This new trend in insurance pricing is the latest reminder of the critical importance of protecting your identity. Identity theft can ruin your credit rating in a matter of minutes; straightening out the resultant damage can take years. That’s why so many individuals are investing in identify theft insurance, policies that protect your assets, including your credit rating, when someone steals your identity by tapping into your personal information online or through physical means such as stealing your driver’s licence and credit cards, chequebook, cell phone, GPS system – anything that holds sensitive information about you or your accounts/assets.

How can you improve your credit rating? Start by being informed: credit scores are based on factors including your payment history, your credit balances, the length you have held your credit cards, what mix of credit cards and loans you use, and how many accounts you have applied for or opened in recent months. Therefore, the following actions have great potential to damage your credit score:

  • Not making payments on your credit cards or consistently paying late.

  • Maxing out your credit cards or maintaining high balances.

  • Closing credit cards (harms your credit history length) or closing cards that have outstanding balances.

  • Falling behind on your mortgage payments or having your house foreclosed.

  • Defaulting on a loan.

  • Filing bankruptcy.

  • Applying for too many loans or credit cards.

  • Limiting your credit history to only loans or only credit cards.

By avoiding these pitfalls and being as responsible as possible about your credit utilization, you can improve your credit rating, your insurance rates, your loan terms and so much more.