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Do Home Insurance Companies Check Your Credit?

You're probably familiar with your credit score, such as the ones calculated by FICO®, and the effect it can have on how a lender views your ability to borrow. What you might not realize, however, is that many insurers also use a version of your credit score to help assess your coverage risk and determine your rates.

Insurers, including home insurance companies, might look at a type of score called a credit-based insurance (CBI) score when you apply for coverage. These scores differ from the scores lenders use in a few key ways, but are influenced by similar factors.

Here's what you should know about how the shape of your credit can help determine your home insurance rates.

What Is a Credit-Based Insurance Score?

A credit-based insurance score is similar to the traditional consumer credit score in that it provides a snapshot of your financial history. But rather than helping lenders assess your likelihood of repaying a loan or line of credit, it helps insurers determine your likelihood of filing an insurance claim. The better your CBI score, the more likely you'll get lower insurance premiums and rates.

There are several companies that create these scores, and the formulas they use to calculate the scores differ. Despite this variance, they are all intended to help the insurance company assess the risk when someone applies for coverage.

Do Home Insurers Check Your Credit?

In states where it's allowed, which is most of them, insurers will usually look at your consumer credit report to see your financial history and assess if you'll be able to pay your premiums.

Home insurers and other insurance companies look for similar criteria as lenders, such as your payment history, any issues with collections and your credit utilization (in other words, whether you're keeping your credit card balances low).

Just like lenders, they want to make sure you have a history of paying your bills on time, don't carry too much debt and don't have a history that includes debt going into collections or filing for bankruptcy.

Will an Insurance Credit Check Impact Your Score?

Your credit score will not be impacted negatively when an insurer checks it because you've applied for coverage.

That's because credit checks fall into two categories: hard inquiries and soft inquiries. Hard inquiries happen when your credit is pulled because you've applied for new credit, like a mortgage loan, and they can slightly ding your credit for about a year. Many hard inquiries in a short period of time can be a red flag since it can signal that you're struggling financially and are using debt to make ends meet.

Then there are soft inquiries, which is when you check your own credit or a lender or other business checks your credit to prequalify you for an offer. Soft inquiries don't affect your credit scores. An insurer looking at your credit history or credit-based insurance scores will result in a soft inquiry on your credit report.

Both hard and soft inquiries will remain on your credit report for about two years.

What Else Can Influence Your Insurance Premiums?

In addition to your credit-based insurance score, there are a few other factors that insurance companies use to determine the cost of your home insurance premium. Remember that insurance is all about risk, so insurers tend to provide coverage at a lower rate to those who are deemed less likely to file a claim.

Home and auto insurers have access to a database of insurance claims filed in the past seven years and may use the information they find there to adjust your rates. That's because a customer who files frequent claims poses a higher financial risk to the insurance company—risk they'll make up by charging a higher insurance premium.

The home you purchase can also play a big role in what you'll pay to insure it. Again, since insurers are looking to minimize risk, the age and construction type of your home play a role, as does the home's location. They'll also consider things like whether the location of the home is prone to severe weather or close to a coast, and the home's proximity to a fire hydrant.

Home insurers might lower a premium if the home has safety measures in place, such as security systems, sprinkler systems and smoke alarms. Riskier features, such as a swimming pool or a trampoline, can cause your home insurance premium to increase.

Keep in mind that the price of your premium will also vary based on your deductible. Typically, the higher your home insurance deductible, the lower your premium will be.

Get Familiar With Your Credit

While your credit-based insurance score is different from your typical consumer credit score, what's found in your credit report will still play a role in how it's calculated. Getting home insurance won't have a negative impact on your credit, but if your credit is in bad shape, you may find it difficult to get approved for coverage, or you may be charged a higher insurance premium. If you're planning to buy a home soon and haven't checked your credit in a while, check your credit report for free through Experian to get a sense of where you stand. If it needs some help, you can spend some time working to improve your credit before you begin the homebuying process.

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