Many homeowners are surprised when their homeowners insurance agent asks for permission to run a credit check before issuing a quote, but doing so is common practice among insurers. According to Bankrate, 85 to 90 percent of insurance companies use an insurance score when calculating premiums. Your insurance score is largely based on your credit score, and it can be improved by manipulating your credit score. By paying your credit card bills twice a month, you can raise your credit score and secure a lower homeowners insurance quote.
Insurers in Most States Use Credit Scores
In 47 states and the District of Columbia insurers use credit scores during their underwriting process. Only three states prohibit the practice: Maryland, Massachusetts and California.
In a fourth state, Florida, insurers can use credit scores but data shows that residents' credit doesn't usually affect their homeowners premiums. According to Insurance Journal, Florida's rates are already the highest in the country because hurricanes are so common in the state. Because natural disasters are almost an annual occurrence in the state, the role of credit is lessened.
Less-Than-Excellent Credit Increases Your Insurance Premiums
In the remaining 46 states and the District of Columbia, your credit score can significantly impact your homeowners premiums. The Insurance Journal's analysis shows that people with poor credit pay are quoted rates 91 percent higher than people who have excellent credit. If a policy's premiums are $1,000 annually, bad credit could increase your premiums by $910 every year.
People who have fair credit don't see quite as high an increase in premiums, but their rates still can go up by as much as 60 percent.
5 Factors Determine Your Credit Score
According to MyFICO, there are five factors that determine your credit score. From most significant to least impactful, they are your:
- payment history
- debt load
- length of credit history
- types of credit
- new lines of credit
Paying your credit cards bimonthly will improve the top two factors listed above, which combined account for 65 percent of your credit score.
Making Payments on Time
First, making payments twice a month will, obviously, ensure your statements are being paid on time. As long as the two payments together are at least as much as your minimum amount due, your credit card will be paid by the due date. If you frequently miss payments because you forget to make them, this will help you avoid being penalized for a late payment.
Reducing Your Debt Load
Second, making payments twice a month, rather than once, will reduce your debt-to-credit ratio, which is part of your debt load. Your debt-to-credit ratio is calculated by dividing your debt load by your available credit.
As an example, assume you have a credit line of $1,000, and this is your only line of credit. If you maxed out this credit, carrying a balance of $1,000, your debt-to-credit ratio would be 1.00 ($1,000 / $1,000 = 1). Alternatively, if you didn't use any of this credit, your ratio would be 0.00 ($0 / $1,000 = 0). You might have a balance of $250, which would be a ratio of 0.25 ($250 / $1,000 = 0.25), or a balance of $750, for a ratio of 0.75 ($750 / $1,000 = 0.75).
Every month, your credit card company reports your limit and current balance, which the credit reporting agencies use to compute your debt-to-credit ratio. By paying your credit cards twice, you'll reduce the balance you're using when your card issuer sends their data to the credit reporting agencies. If the two payments are spread out, then one will always be shortly before the date that your credit card company reports this information.
Your lower balance will be reflected in a lower debt-to-credit ratio, which, in turn, will give you a better credit score. This will ultimately help you qualify for better homeowners insurance rates, because it'll improve your insurance score.
If you're thinking about shopping for a new homeowners policy, start paying your credit cards bimonthly. After a few months of paying your credit cards bimonthly, your credit score should be improved, and your insurance agent will hopefully have a lower quote for you.