Here at Credit Karma, we're constantly preaching the importance of your credit score. We might sound like a bit of a broken record by now, but we're back again to highlight another important effect of credit health.
Home insurance companies are interested in your credit history. They're so interested that specific scoring models have been developed to create credit-based home insurance scores. These scores use the correlation between credit information and insurance losses to predict how likely you are to file an insurance claim that could result in losses.
Not Too Different from Your Credit Score
Home insurance scores have some basic similarities with your credit score, as well as important differences.
What's the Same
- It's a score. Like any of your credit scores, your home insurance score is determined by assigning negative and positive values of varying weight to information on your credit report. Those values are then put through a complex algorithm to establish a single score.
- It's only part of the process. Similar to applying for credit, your score isn't the only thing insurance companies may look at when deciding whether to approve you and how much to charge. The difference here is that instead of considering your income and assets, a home insurance company is more likely to consider things like how far your home is from the nearest fire station, whether it's alarmed and your prior claim history.
- Who's calculating? Your home insurance score can be calculated by one of the three major credit bureaus, by another company's proprietary scoring model, or it could be calculated by the insurance company directly, using their own data and scoring models.
- What are they looking for? Whereas your credit score is used to predict the likelihood that you will pay back borrowed money, your home insurance score is used to predict your insurance risk, or the likelihood that you will file a claim in the future that results in losses to the insurance company. Consequently, your home insurance score weighs your information differently than a traditional credit score might.
What Makes a Good Home Insurance Score
Like other credit scores, the complexity of factors and calculations involved in generating the score makes it impossible to determine exactly what will raise or lower your home insurance score. Based on studies that have been done on credit information and insurance losses, here are a few aspects of your credit history that insurance models might incorporate into your score:
- Age of Oldest Account. Generally, the longer your oldest account has been open, the higher your credit-based insurance score. Unlike average age of accounts, this factor is based only on your oldest open account. It typically considers all lines of credit, including mortgages and installment loans.
- Derogatory Marks. Derogatory marks cover a variety of negative information on your credit report. Like many of the following factors, derogatory marks are considered a sign of weak risk-assessment skills, so they will likely count against your home insurance score.
- Account Status. Each account on your credit report has a status that lists whether the account in question is being paid on-time and in full. If you're late on payments, that fact can be noted in 30 day increments. Your account status may also specify if an account has been subject to collection, foreclosure or repossession. The more accounts listed in negative status, the greater insurance risk you may be assumed to represent and the lower your home insurance score is likely to be.
- Amount Past Due. This is the total dollar amount of debt that you are late on paying back. Your total amount past due is related to account status, but may be considered separately because even one account being only 30 days late could represent a large insurance risk if the balance is exceptionally high.
- Hard Inquiries. Hard inquiries are made when you apply for a new line of credit, as well as under some other circumstances. The more hard inquiries you have, the greater insurance risk you are likely to represent.
- Credit Card Utilization. Your utilization is the total amount of outstanding debt on your credit cards divided by your total credit card limits. Generally, models predict that individuals with high credit card utilization are a greater insurance risk.
- Total Credit Card Limits. This is the total dollar amount of all the limits on all of your credit cards. Higher total credit limits are likely to represent a lower insurance risk.
Generally, these factors are slightly different than the traditional credit score metrics. Still, they typically reflect the same kind of responsible borrowing habits that lead to a healthy credit history.
Why are they used?
Home insurance scores are meant to calculate potential for risky behavior in an insurance context. However, by measuring the amount and degree of risky behavior consumers engage in with their credit, insurers can predict how likely they are to engage in risky behavior that could lead to a costly insurance claim. This reasoning has been supported by a strong correlation between certain credit behaviors and insurance losses. Like everyone who reviews your credit information, home insurance companies want to see a history that reflects stable and responsible decision making.
If you're worried about your home insurance score, the good news is that maintaining your general credit health is a great place to start. If you're reading this article, you've probably already been keeping an eye on your credit, so keep it up. As any repeat reader of our articles has found out by now, responsible credit management can work to your benefit in more ways than just one.
About the Author: Laura Ross has been a Member Support Specialist at Credit Karma since December 2013. She can usually be found riding bikes around town late at night, communing with animals and eating sweets.
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