Credit scores impact homeowners insurance rates more than disaster risk: report

HOUSTON - A new report says credit scores can have a bigger impact on your homeowners' insurance rates than a home's risk of a disaster, and it says in Texas, it can cost some homeowners almost twice as much.

The Consumer Federation of America just issued a report saying insurance companies are charging homeowners twice as much for having a lower credit score, which is roughly a 630 FICO score.

Difference in homeowners' insurance rates

More severe disasters like hurricanes and storms have damaged homes and driven up insurance premiums in recent years.

But insurance companies also consider other factors, such a home's roof, construction, and location, or the owner's occupation, marital status, or credit score.

By the numbers:

The CFA says it found homeowners with similarities, the same type of house, same zip code, same level of risk, may be charged wildly different rates because of their credit scores.

The report says in Texas, consumers with a low credit score can pay 95% more for homeowners insurance, totaling an average of nearly $3,000 more a year.

This link to their report includes an interactive map breaking down their findings in each county. It reports that in Harris County, homeowners with low credit scores can pay $3,108 more, while homeowners with medium credit scores can pay $1,197 more a year.

SULLIVAN'S SMART SENSE: Rental car companies using AI to catch car damage, billing customers

"It shapes who can even afford to buy a house in some areas, or who can afford to stay a homeowner, because they simply can no longer afford their insurance premiums," said Sharon Cornelissen with the Consumer Federation of America. "So people will have to go either underinsured or go without insurance altogether. But for many homeowners, it's not optional."

CFA argues that states should ban the use of credit scores in setting insurance rates, as it has been in California, Pennsylvania, and Massachusetts.

Why are credit scores considered?

The other side:

The Insurance Information Institute, however, responds in a statement that credit-based insurance scores are essential to accurately rate risk for auto and home insurance for the following reasons:

• Banning credit-based insurance scores can potentially hurt both insurance companies and consumers. Insurance is regulated at the state level and departments of insurance work with their state legislators to determine the regulations in their individual states.
• Insurance industry actuarial data has validated that credit-based insurance scores are strongly correlated with claim frequency and severity. How one manages their finances is a predictor of risk. Without insurance scores, insurance carriers might lose a statistical tool that helps differentiate high-risk and low-risk policyholders.
• Without the use of credit data, insurers may need to rely more heavily on broader risk factors like age, location or claims history, which can be less precise. This can lead to overpricing low-risk customers and underpricing high-risk customers.
• When risk is harder to assess, insurer loss ratios can increase, which can lead to rate hikes across the board to maintain profitability.
• Customers with strong insurance scores often get lower premiums. Removing insurance scores can flatten the risk pool, meaning many careful, no-claim policyholders could experience rate increases, essentially subsidizing high-risk policyholders.
• If insurers can't price risk accurately, they may pull back from certain markets or product lines, reducing competition. Meanwhile, across-the-board rate increases could push some price-sensitive consumers out of the market.

What you can do:

So what can homeowners do to get lower insurance rates? Experts say working on improving their credit scores before renewing a homeowners' policy can help, as well as shopping around for the best rates.