Improve Your Insurance Score

Most people expect the cost of homeowners insurance to go up after a claim is  filed. But it may surprise you to know that how good you are at managing your  finances can have just as big an effect on your premium as the tree that fell on  your house.

Insurers look to your credit history to calculate an insurance score that’s  used to judge how much of a financial risk you are. The lower the score, the  higher the risk—and the higher the premium you’ll likely pay on your homeowners  insurance. Don’t despair. There are strategies, including paying bills on time,  that can help improve your insurance score.

Good credit pays off

Wondering what too many credit cards has to do with the limb that landed on  your roof? More than you’d think, it turns out. Several studies have found that your credit history is a good  indicator of how often you’re likely to file an insurance claim. Because more  claims translate into more expense for insurance companies, homeowners with low  insurances scores tend to be charged higher premiums.

Insurers claim the  use of credit-based insurance scores is fair and actually works in favor of  fiscally responsible consumers. A 2006 study found that 53% of Oregon  policyholders paid lower premiums on homeowners insurance thanks to credit-based  insurance scores. ECONorthwest, the group that conducted the research,  estimated the average annual savings for policyholders nationwide at $60.

How your insurance score is calculated

Your insurance score starts with your credit report, a history of your credit use.  What credit cards and loans do you have? What are the balances? How promptly do  you pay? Your report also includes information gleaned from public records such  as bankruptcies and liens. FICO is the best-known company that turns the  information in credit reports into credit scores. FICO credit scores range from 300 to  850.

Insurers are less concerned than lenders about your ability to pay  back a specific amount than your overall ability to manage money, says Allstate  spokesman Adam Shores, especially whether you make late payments and how long  since delinquencies took place. Your insurance claims history, as recorded in  your CLUE  report, also affects your insurance score. So can your age, the construction  of your house, and whether you’ve installed smoke detectors and other safety  equipment.

All of these data are crunched to come up with a numerical  insurance score. This is where it gets tricky for homeowners. There isn’t a  single source for insurance scores, and your insurer probably won’t tell you  your score even if you ask. Some insurers employ proprietary formulas. Others  use insurance scores calculated by companies like FICO and ChoicePoint, the  latter of which will sell you your score for $12.95. ChoicePoint’s Attract  insurance scores can range from 200 to 997, with a score over 776 considered  good.

Ways to raise your score

The most effective way to raise your insurance score is to improve your  credit score. You’re entitled to free copies of your credit reports annually  from the major credit bureaus: Equifax, Experian, and TransUnion. Order them and look for errors:  Is your Social Security number correct? Are all the debts and credit cards  yours? Do the balances jibe with your records? Errors can be disputed  online.

If the information on your credit report is correct, there are still things  you can do to improve your score. Paring down balances on credit cards is a big  plus. Paying bills by the due date is another major factor, accounting for 35%  of a FICO credit score. Time is also on your side. Most late payments are  removed from your credit report after seven years. A few major problems such as  a bankruptcy may stay on for a decade or more.

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