Poor Credit Can Raise Home Insurance Premiums by 24%

The impact of credit scores on homeowners insurance premiums is a topic that has been gaining attention recently. A new working paper from the National Bureau of Economic Research (NBER) sheds light on this issue, revealing that a low credit score can result in higher homeowners insurance premiums, similar to how it affects mortgage rates.

The researchers at NBER conducted a study using data from a natural experiment in Washington state where insurers were temporarily banned from using credit data to set home insurance rates. The findings showed that lower-credit borrowers pay more for homeowners insurance for reasons beyond just physical risk exposure. In fact, the study suggested that a low credit score can increase premiums as much as living in a disaster-prone area.

The correlation between credit scores and insurance rates is not entirely surprising, as most insurance companies use credit reports in their underwriting process. People with lower credit scores are more likely to file claims after sustaining damages, possibly due to financial constraints that limit their ability to pay for repairs out-of-pocket. This leads to insurance companies charging individuals with poor credit scores 24% more for the same coverage as those with excellent credit scores.

Overall, homeowners across the nation have been experiencing significant rate hikes in their insurance premiums. Data from ICE Mortgage Technology revealed that annual premiums have increased by nearly 7% from the previous year, with a total rise of almost 70% in the last five years. The average homeowner now pays around $200 per month or $2,400 per year for insurance.

Interestingly, the study found that the insurance burden on homeowners has been increasing, with insurance accounting for a larger share of total housing costs. For those with low credit scores, this burden has risen even faster, jumping from 17% to 24% between 2020 and 2024. This indicates that individuals with poor credit are facing higher insurance costs compared to those with better credit scores.

In conclusion, the study highlights the significant impact that credit scores can have on homeowners insurance premiums. It emphasizes the importance of maintaining a good credit score not only for securing favorable mortgage rates but also for reducing insurance costs. As insurance premiums continue to rise, it becomes increasingly crucial for homeowners to be aware of how their credit score can influence their insurance expenses.