Poor Credit Can Increase Home Insurance Payments by 24%
You probably already know that having poor credit means paying higher interest rates when buying or refinancing a home.
But a new working paper from the National Bureau of Economic Research, or NBER, found that there is a second category of housing costs that are influenced by your credit score: homeowner’s insurance premiums. According to the researchers, “Lower credit scores raise premiums almost as much as they raise loan rates.”
The authors of this paper analyzed data from an environmental study that occurred when the state of Washington temporarily prohibited insurers from using credit data in setting home insurance rates. They wrote that their research “suggests[ed] that low-income borrowers pay more for reasons other than physical risk exposure.”
In addition, this low credit score is important: Your credit has a big impact on your homeowner’s insurance premium like whether you live in a disaster prone area or not.
It’s not entirely surprising that credit scores influence home insurance rates. With the exception of a few states that restrict the use of credit reports in underwriting insurance, most insurance companies use that information. People with low credit scores are more likely to apply after sustaining damage, perhaps because they have less borrowing power to pay for home repairs. “Applying may be the cheapest, if not the only, way to cover unavoidable costs,” the paper notes..
But the extent of the correlation between low credit scores and high premiums surprised researchers. They found that insurance companies charged people with bad credit 24% more for the same insurance as people with excellent credit scores.
Insurance premiums are rising for all – but not equally
Homeowners across the country have endured eye-watering increases year after year. But the pain has been even greater for those with bad credit. Moreover, this financial pressure has been getting worse over the past decade.
Data from ICE Mortgage Technology found that annual homeowner’s insurance premiums increased by $149, or about 7%, from a year ago. Ironically, this is relatively good news, because less foot traffic than the double-digit increases homeowners have endured for three years in a row. Overall, premiums have increased nearly 70 percent in the past five years alone.
The average homeowner now pays about $200 a month, or about $2,400 a year. While it’s well known that homeowners in some areas pay more, the NBER determined that credit is a geographic factor, and that rates for homeowners with poor credit have risen faster than rates for those with good credit.
Researchers have found that insurance accounts for an increasing share of homeowners’ total housing costs. This “insurance burden,” as the paper puts it, increases from 12% in 2020 to 15% in 2024. However, for homeowners with low credit scores, that share has risen quickly, and by a large margin. It jumped from 17% to 24% in the same period. Homeowners in the bottom 20% of the credit spectrum pay, on average, $550 more per year than the 20% of homeowners with the highest scores.
And that increase is increasingly wreaking havoc on homeowners’ budgets. As the NBER paper noted, while most homeowners have modest mortgage payments that don’t change from year to year, annual insurance policy renewals force homeowners to deal with sticker shock — and adjust their budgets accordingly — over and over again.
Because many insurance companies today use credit scores in their underwriting, homeowners looking to lower their premiums should take steps to improve their credit and comparison shop for the best home insurance rates after raising their score.
More from Mali:
10 Home Improvements That Can Lower Your Insurance Bills
Homeowners Raise Insurance Deductibles to $5,000 or More to Save Money
Sticker Shock: Homeowners Worried About High Insurance Rates and Slow Claims
