Jill Chodorov, an associate broker with Long & Foster, writes an occasional column about market trends and housing issues in the Washington area.
Credit score not up to par? You may pay more for homeowners insurance in the District and Virginia.
It is widely known that your credit score is a major factor in determining whether you will receive a loan to purchase a home and the rate of interest you will pay on that loan.
You may not know, however, that your credit score is used to determine what you will pay for insurance on that home, or if you will get insurance at all.
“Credit is the best predictor of your making a claim,” said David Vidmar, an insurance agent with State Farm in Gaithersburg, Md. “If you don’t have money to pay your bills, how likely are you to pay your deductible or file small claims?”
According to the National Association of Insurance Commissioners, most insurance companies judge us by our credit-based insurance scores.
Credit-based insurance scores were introduced in the early 1990s and use certain elements of a person’s credit history to predict how likely a consumer is to have an insurance loss. Research shows that there is a correlation between credit and insurance losses.
This means a record of late payments on a credit card or auto loan can increase the amount you pay in homeowners (and auto) insurance premiums. You could also be denied insurance completely.
There can be significant unexpected ramifications to a higher insurance premium.
“If your insurance premium is higher than expected, it could actually result in being denied a mortgage,” said Jonathan Okun, senior mortgage consultant with Prosperity Mortgage. “If your debt-to-income ratios are already tight, an extra $30 or $50 a month in insurance premiums can push you over the edge.”
According to FICO, an analytics firm that helps businesses assess the credit-worthiness of consumers, about 85 percent of insurers use credit-based insurance scores, but the scores can only be used in states where it is legally allowed.
In Maryland, insurers are not allowed to review a person’s credit history when pricing a homeowners insurance policy. In addition, they cannot review it when deciding whether to cancel or issue a policy.
“The Maryland General Assembly passed a law that prohibited the use of credit history by insurers,” said Vivian Laxton, director of public affairs for the Maryland Insurance Administration. “That law took effect in 2002.”
The District and Virginia, on the other hand, allow the use of credit history.
Although the District does not prohibit the use of credit score to determine insurance rates, the D.C. Department of Insurance, Securities and Banking recently released a bulletin issuing “guidance” to insurers. The bulletin said that “if credit scores are used to rate policies, then policyholders should be permitted to take advantage of any improvements of their credit score.”
Once a year, at the renewal date, policyholders can request from their insurer that their policy is reevaluated based on updated credit scores.
Improving your credit-based insurance score is just like improving your regular credit score:
• Make payments on time.
• Pay bills, taxes and fines/fees as agreed.
• If you are behind on payments, catch up and stay current.
• Keep balances on credit cards as low as possible.
It is important to understand your state’s law on the use of credit when underwriting an insurance application or renewal. Contact your state insurance department. Click here for a list of state insurance departments with contacts.
Ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy, and which risk category you were placed in after you receive a quote.
Shop around and compare quotes. Be sure to compare apples to apples on the coverage, deductibles and service.
Previously from Jill Chodorov:
Jill Chodorov can be reached at firstname.lastname@example.org.