How Poor Credit Could Raise Your Renters Insurance Rates
Renters insurance may cost nearly twice as much if you have bad credit.The cost of renters insurance is determined by where you live, the amount of coverage you select, and whether you have filed any previous claims. However, in most states, your credit history also influences your rate — and it can make a surprisingly large difference.
According to a recent InsuredCircle analysis, renters insurance rates for people with bad credit are 83 percent higher than those for people with good credit in states where credit is used as a rating factor. (What constitutes a poor or good score varies by insurer, but these scores generally correspond to FICO credit score ranges.)
Using credit to set renter or other types of home insurance prices is currently prohibited in California, Maryland, Massachusetts, and Washington.
How credit affects renters insurance rates
Credit-based insurance scores have been used by insurers to help set rates and determine who they are willing to insure since the 1990s.
Your insurance score is comparable to, but not identical to, the credit score that banks consider when you apply for a credit card or loan. Both scores include the same elements, such as payment history and outstanding debt, but they are weighted differently. If you have a low credit score, you most likely have a low insurance score as well.
You may not believe that how you manage your money has anything to do with your likelihood of filing an insurance claim, but studies have shown that those with lower credit-based insurance scores are more likely to file claims than those with higher scores.
What was the end result? In most states, people with bad credit have to pay significantly more for insurance.
“The insurance companies want to accurately predict the likelihood of a [claim] so that everyone's premiums are accurate and fair,” explains Christine Barlow, a chartered property casualty underwriter and managing editor at FC&S Expert Coverage Interpretation. She believes that if someone is more likely to file a claim, they should pay more for insurance.
Are credit-based insurance scores fair?
Even if your insurance score accurately predicts whether you will file a claim, using it as a pricing factor has become increasingly controversial, owing to the disproportionate impact on lower-income and minority populations.
“People with bad credit pay a lot more, which makes life a little bit more difficult for poor people,” says Bob Hunter, director of insurance for the Consumer Federation of America. “Because of the country's demographics, it's also more difficult for [many] people of color.”
The COVID-19 pandemic has exacerbated such hardships, with Black and Hispanic populations experiencing higher unemployment rates than white workers.
In an email, Naeem Siddiqi, a senior advisor and credit risk expert at analytics firm SAS, said, “Using credit score for premiums only exacerbates [income] disparity, especially amid the pandemic as many face unemployment or underemployment.”
Some states have put a temporary halt to the practice in order to avoid penalizing those who have had financial difficulties as a result of the pandemic. Nevada made it illegal earlier this year for insurers to deny coverage or raise premiums based on credit score changes on or after March 1, 2020. In addition, Washington's insurance commissioner recently proposed a three-year ban on using credit information to price auto, homeowners, and renters insurance.
How to find cheaper renters insurance
Those with bad credit don't have to accept exorbitant rents or forego renters insurance entirely. These suggestions can help you save money.
Examine your credit reports. Siddiqi advises that if your premium increases, you should ask the insurance company why. You must be notified under the Fair Credit Reporting Act if your credit data contributed to an "adverse action," such as a higher interest rate. If this occurs, promptly review your credit report and dispute any errors you find.
Shop around. Because each insurer has its own pricing formula, it's a good idea to get quotes from at least three different companies to ensure you're getting the best deal. Barlow suggests working with an independent insurance agent who will shop around for you.
Look for discounts. According to Alan Umaly, president of Westwood Insurance Agency, you could save money by combining your renters and auto insurance policies with the same company or by informing your insurer if your home has an alarm system. Other discounts may be available for paying in full in advance or enrolling in autopay.
Raise your deductible. A deductible is the amount deducted from your insurance payout if you make a claim. A higher deductible can lower your premium, but it may not be worth it if you would have difficulty covering that deductible in the event of a claim.
Improve your credit score. On-time bill payment and debt reduction can help you build credit over time and eventually qualify for lower insurance rates.