The costs of homeownership can add up quickly. Beyond the mortgage payments, homeowners face additional costs, like property taxes and home insurance, which can easily put pressure on household budgets.
Since mortgage lenders tend to require homeowners insurance, it’s an unavoidable cost, unless the home is completely paid off. But for homeowners with bad credit, the cost of insurance can feel especially burdensome.
A recent report from the Consumer Federation of America (CFA) found that the typical homeowner with a low credit score is paying 99% more each year for coverage. While elevated costs vary from state to state, many homeowners with low credit feel the pinch of these higher rates.
If you are facing high home insurance premiums, understanding how your credit score impacts your rates could help explain your costs.
When determining your premiums, insurance companies take a wide range of factors into account. Some take your home’s age and condition into account. But other variables can include things like risk of flooding, proximity to a fire department and your credit score.
While many factors are included, your credit score can have a significant impact on your costs. The typical homeowner with a low score (defined as 630 or lower) pays $1,996 more per year for coverage.
The CFA report also found that homeowners with low credit scores often face higher rates than those who live in a high disaster risk area. That could mean living with a bad credit score could push their rates higher than even those living in a hurricane-prone or wildfire-prone area.
It’s clear that this practice could significantly hurt homeowners on a budget. The report also notes that this practice “disproportionately harms Black, Hispanic, and Native American homeowners, who tend to have lower credit scores due to the longstanding racial wealth gap and other persistent structural barriers.”
But homeowners in some states face significantly higher credit penalties than others. Those in Pennsylvania, Arizona, Oregon and West Virginia were found to face the highest penalties for bad credit. But other states, like California, Maryland and Massachusetts, have banned the practice of using credit scores when determining insurance premiums.
