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Poor Credit Scores Equal Higher Homeowners Insurance Premiums

AUG 15, 2014 12:29pm ET
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A high credit score is not only important for consumers to get a good price on a mortgage; it's also a factor in how much they pay for homeowners insurance.

Those with poor credit pay 91% more than people with excellent credit, while those with median credit pay 29% more, according to InsuranceQuotes.com, a part of Bankrate Insurance. Quadrant Information Service conducted the study in July for InsuranceQuotes.com

Homeowners insurance is a secondary market requirement for borrowers to obtain a mortgage. If the property owner did not purchase a policy or because the policy was cancelled after the renewal premium was not paid, the servicer can purchase a force placed insurance policy.

"This is another example of why credit is such an important part of your financial life," said Laura Adams, a senior analyst with San Francisco-based InsuranceQuotes.com in a press release. "Maintaining a good credit history suggests that you're a less risky customer and can lead to several hundred dollars in annual homeowner's insurance savings."

InsuranceQuotes.com used credit-based insurance scores, which are different from FICO scores in determining the buckets. It divided them into 10 tiers (each representing 10% of the market) and defined excellent credit as the top 10%. The poor bucket consists of consumers in the second-worst tier, the 10th to 20th percentile. The median credit bucket consisted of consumers in the 55th percentile. It ruled out using consumers in the lowest percentile band for the poor bucket and to find the statistical median because it felt that would not make for an accurate representation of the market, an InsuranceQuotes spokesman said.

There are three states which bar underwriters from using credit as a factor in calculating homeowners insurance premiums: California, Massachusetts and Maryland.

Florida is so risky because of hurricanes that homeowners pay the highest rates in the nation (an average of $1,933 per year versus the nationwide average of $978 per year) and therefore credit is less of a concern in underwriting these policies. The study found there is zero difference in what consumers pay for insurance in that state based on credit score.

Consumers with poor credit in West Virginia pay 208% more for homeowners insurance compared with those with excellent credit. In Virginia consumers can pay 186% more, Ohio they pay 185% more and Washington, D.C., 182% more.

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