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How Your Credit Affects Your Homeowners Insurance
If you've researched or gone through the process of getting a home loan, you
know how important it is to have a good credit history. But did you know
insurance companies also use your credit habits in determining whether
they'll provide you with insurance and how much you'll pay?
Insurance companies have traditionally used many factors in determining how
much of a risk you are to get into an accident or incur losses resulting in
claims.
For example, insurers will look at your driving record and how long you've
been driving when you seek auto insurance. Likewise, when you apply for
homeowners insurance, they'll look at the age, size, and construction of
your home.
Through the years insurers have found a person's credit information to be a
highly accurate predictor of risk, according to the Insurance Information
Institute, a non-profit organization supported by the property and casualty
insurance business.
While insurers look at the same factors as lenders, they weigh each factor
differently.
"The biggest difference is that insurance risk scores look for stability,
but credit risk scores look for a reliable pattern," Craig Watts, a
spokesperson for Fair, Isaac, and Co., whose insurance risk scores are used
by about 300 insurers nationwide, told www.insure.com.
Insurance companies typically weigh the factors as follows, according to
FIC:
30 percent: How much you owe. This typically evaluates how many accounts
you have, how many have balances, and how much is owed on existing loans.
15 percent: Length of credit history. Usually the longer your credit
history, the better your score on this section.
10 percent: New credit. If you've opened a lot of new accounts in a short
period of time, your score will be lower. The system also takes into account
how long it's been since you've opened an account. And if you had a bumpy
period followed by a strong payment history, it will be considered
favorably.
35 percent: Payment history. You'll score high here if you make your
payments on time and you don't have any bankruptcies, foreclosures, liens,
or the like. If you have made late payments in the past, your score will
reflect how frequently you were late and how late you were - in the eyes of
insurance companies 90 days is viewed as much riskier than 60 days.
10 percent: Types of credit. This will factor in your credit mix - retail
accounts, installment loans, credit cards, finance companies, etc.
"Insurance scores are also more interested in how regularly you pay than in
how much you already owe," Watts said.
Credit scoring is usually an advantage for those who have stellar credit
histories because it can mean lower rates. It can also be advantageous to
those who have a good history but may have filed claims in the past.
If you have a wobbly credit history, you can work on cleaning it up by:
Requesting a copy of your report and making sure it's accurate.
Keeping your balances low.
Paying off your debt.
Making payments on time.
Refraining from opening new accounts.
Re-establishing credit if you've had problems in the past - but do so
responsibly.
Contacting a legitimate credit counselor, like Consumer Credit Counseling
Services.
Knowing that closing an account doesn't wipe it from your credit history.
And if your credit score has bumped up your insurance rates or if you're
looking for ways to reduce how much you pay for homeowners insurance, you
can begin by shopping around and comparing rates. You can also lower your
premiums by raising your deductible amounts.
Written by Michele Dawson
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