What is a Credit-Based Insurance (CBI) Score?
In most states in the US, insurers use a credit-based insurance score to help them determine home insurance rates. Insurers can collect, analyze and process information about past financial behavior, like how many missed bills or late payments you’ve made and any/all debts that you have accrued, to formulate a personalized Credit-Based Insurance (CBI) Score. The more mistakes you have in your financial past, the more likely you are to have a low credit score. This score is just one of the ways that insurers can find out the stability of an individual’s assets and finances.
For people who are living paycheck to paycheck, or making an unlivable minimum wage, building up a higher credit score can be challenging. People with low credit scores will find that buying a house can be an extremely arduous task. It can also be extremely expensive, since people with low credit scores will be charged, more often than not, higher insurance premiums as well as higher interest rates. Homeowner’s insurance for those with low credit scores could be almost 75% more than that of homeowners with good credit.
What are some factors that can affect your credit score?
Every insurer/agent has their own way of calculating what is perceived as a ‘poor’ or ‘good’ credit score, but a good credit score usually ranges between 690 and 720, while any score under 630 is usually seen as poor. However, some states like California, Maryland & Massachusetts have made it clear that using credit scores to set condo/homeowner/rental/mobile home insurance prices is not allowed.
The reason a credit score can affect your home insurance rate is because it helps the insurer weigh the ‘risk’ behind being able to make their money back. The theory is that by charging ‘high risk’ users a premium insurance rate, the insurer will at least be able to make up their ‘risk’ with a higher percentage of incoming money per month.
Factors that can positively affect your credit Score:
- Long Credit History
- Numerous bank/credit accounts that maintain good/high values
- No/minimum late payments
- Low credit usage
- Timely loan paybacks
- Strategic loans/EMI packages that are paid back in time
Factors that can negatively affect your credit score:
- Short/minimal credit history
- Bank/credit accounts that are in collection
- High Credit Usage, Low payback rates
- Numerous recent credit applications
- Untimely loan/credit payments
- Past due bills/loans/credit cards/EMI packages
You will find that in a majority of cases, the two most important factors in determining someone’s credit score are previous credit paybacks and performance (paying bills/loans on time), and the type & amount of outstanding debt that has been accrued – smaller loans don’t hold as much weight as larger loans or those that have been outstanding long past their due dates.
The most unfortunate part of this process for a person looking to get a loan for a home is that each insurer has their own way of calculating credit scores. So while you may have a good credit score using the free online services available to you, the insurer may have completely different weightages on several different components of the credit score, and as a customer, you are not privy to their ratings. However, the difference between your credit score and the insurer’s CBI aren’t all that far apart, so knowing your own score is a good first step in knowing whether you will be able to get a favorable loan and/or homeowner’s insurance.
What is the difference between a FICO score and a CBI score?
A FICO score is another form of a credit score that usually covers a large portion of the credit report that moneylenders/financiers use to analyze a potential client’s credit risk. The main difference between the FICO score and the CBI score is that FICO scores typically pinpoint the risk behind paying back a loan/credit line/asset value, whereas a CBI score assesses how likely you are to file a claim. These differences may seem small, but in reality they take different variables into account, while also assuming risk and the possibility of risk in different ways.
How can you get cheaper homeowner’s insurance with bad credit?
First, people with extraordinary circumstances can sometimes be rewarded with good insurance rates, if their reasons are valid and can be investigated easily. In the event of a catastrophic natural disaster, or the death of a close family member, or identity fraud, these circumstances can be relayed to the insurer and make them more likely to give you a more helpful insurance rate.
Second, if you have always maintained a good home, and hardly ever make insurance claims, you are more likely to get an inexpensive rate, as this reduces the insurer’s risk.
However, if you still have a poor credit score, it doesn’t automatically disqualify you from receiving insurance, rather it just makes it a more tedious process. You might have to do your research and find the best rate available for someone in your circumstances. Do this once in a while, so you are always in the know about which insurance companies provide the best rates for someone in your situation. You may find that a few years into owning a home, with steady payments, and few to no insurance claims, you might be eligible for better insurance rates with other insurers.
Boost your credit score to substantially decrease your homeowner’s insurance rates:
You will need to take your time and be persistent in order to improve your credit score, but doing so consistently will have a definite positive impact on your homeowner’s insurance rates. Some of the ways you can improve your CBI score include:
- Making sure that all your monthly bills are paid ON TIME!
- Expediting your monthly credit card payments by ideally paying them in full, on time, each & every month, while also staying below your allowed credit limits
- Consciously avoid starting new lines of credit – this can make it look like you are overextending your available credit limit
- Double-checking your credit report, resolving any errors or discrepancies you discover, and flagging any suspicious activity in time
- Buying certain products at an EMI rate, and paying them back on time, or faster to decrease your risk assessment
- If you find an error in your credit report, contact the company that performed the credit report and have the mistake rectified immediately.
So long story short, YES, in most states of the US, your credit score can definitely affect your homeowner insurance rates. Hopefully, with some of the advice from this article, you will be able to figure out what is best for you, and that you can find a way to make sure that you pay as little as possible!