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Improving your credit could lower your home insurance rates

September 16, 2015

There's a lot to think about when buying a home:  How safe is the neighborhood? How are the schools? Are there parks nearby for your children to play in? But one thing you might not have considered is your home insurance:  specifically how your credit score may significantly raise your rates.

Paying your bills on time could lower your home insurance payments

You credit history may have more impact on your premium than all other factors, even the condition of your home. According to a report in The New York Times, an excellent credit score can save you as much as 32 percent on your homeowners insurance. On the other hand, if your credit score is low, you might be paying twice as much on average.

While some consumers groups have called the practice unfair, it is unlikely to change. Studies, including a 2007 report by the Federal Trade Commission, have provided insurance companies with a fair amount of evidence that lower credit scores indicate an increased risk for a higher number of filed claims, both for home and auto insurance. If your insurance company believes you are at a higher risk for filing a claim, you can expect to pay a higher premium.

So what's the smart homeowner to do? Start with a few simple steps to improve your credit.

Double check

"You credit history may have more impact on your premium than all other factors."

Mistakes in credit reporting are not uncommon. Running your own report allows you to verify that your insurer is getting correct information, and also lets you be on the look out for fraudulent purchases or identity theft. Several websites and financial institutions offer a free yearly credit report that will give you a good sense of where your credit is and how it compares to the national average. Remember, if you see anything suspicious on your report or your monthly bill from a lender, make sure you dispute it.

It's equally important to understand that running your credit report too many times can negatively affect your score. It may appear that you are desperately seeking a loan, even if you are merely being diligent. You should also know that many businesses you interact with frequently, such as car rental companies or Internet service providers, are already running your score. Luckily, none of these companies are allowed to run a report without your permission, so you can keep track of how often your score is being pulled.

Get a credit card

It might seem surprising, but if your credit is low it may simply be that you don't owe anything and never have. You build credit by borrowing and paying back what you borrowed, so the easiest way to grow your credit is to borrow a small amount that you can easily pay back. Being a responsible credit card user is one way to do that.

That said, don't go crazy with your card. Even if you're making regular payments, you want to keep the balance on the card low. Keeping your credit line maxed out reflects poorly on your credit, as does opening too many accounts at the same time.

Pay your bills

It sounds simple, but the best way to build your credit is to pay off your debts. FICO, the software company that provides most of the credit reports in the United States, factors in late or skipped payments as 35 percent of your overall score. If you're a forgetful person, consider setting up an automated payment with your lender. If you've got some spare cash, it's also worth making an extra payment. The sooner you pay down those debts, the sooner your score will improve.

Talk to your home insurance agent

The Fair Credit Reporting Act requires your insurance provider to notify you if poor credit was a factor in determining your home insurance premium. Follow up with your agent to find out how your score compares to other consumers and what score you need to reach to get a lower premium.