The cost of renters insurance varies depending on where you reside, how much coverage you select, and whether you’ve made any previous claims. However, in most jurisdictions, your credit history has an impact on your rate, which can be rather significant.
According to a recent Reliableinsurance report, renters insurance prices for persons with poor credit are 66% higher than those for people with strong credit in states where insurers utilize credit as a rating factor. (What constitutes a bad or good score varies per insurer, although these ratings are generally consistent with the FICO credit score ranges.)
California, Maryland, and Massachusetts now prohibit the use of credit to set renter or other types of home insurance pricing.
How credit affects renters insurance rates
Since the 1990s, insurers have utilized credit-based insurance scores to assist determine premiums and who they will insure.
Your insurance score is comparable, but not identical, to the credit score that banks use when you apply for a credit card or loan. Both ratings include the same characteristics, such as payment history and overdue debt, but they’re weighted slightly differently. If you have a low credit score, your insurance score is probably low as well.
You may not believe that the way you manage your money has anything to do with your likelihood of filing an insurance claim, but studies have found a link. Individuals with lower credit-based insurance scores are more likely to file claims than those with higher scores.
What was the result? In most areas, those with bad credit pay much more for insurance.
“The insurance companies want to accurately predict the chance of a [claim] so that everyone’s premiums are correct and fair,” says Christine Barlow, a chartered property casualty underwriter and executive editor at FC&S Expert Coverage Interpretation. If someone is more likely to file a claim, she notes, “logically, they should pay more for insurance.”
Are credit-based insurance scores fair?
Even if your insurance score accurately predicts whether you’ll file a claim, utilizing it as a price element is becoming increasingly contentious. This is largely due to the practice’s disproportionate impact on low-income and minority groups.
“People with bad credit pay a lot more, and that [makes] life a little bit harder for poor people,” says Bob Hunter, former director of insurance at the Consumer Federation of America. “Because of the demographics in the country, that means it’s also harder for [many] people of color.”
The COVID-19 pandemic intensified such challenges, with black and Hispanic people seeing higher unemployment rates than white workers.
“Using credit scores for premiums only exacerbates [income] disparity, especially amid the pandemic as many face unemployment or underemployment,” said Naeem Siddiqi, a senior advisor and credit risk expert at analytics firm SAS, in an email.
How to find cheaper renters insurance
Those with bad credit do not have to settle for exorbitant prices or go without renters insurance at all. These methods can help you save money.
Check your credit report. If your rate increases, Siddiqi recommends asking the insurance company to explain why. According to the Fair Credit Reporting Act, the insurer must notify you if your credit information contributes to an “adverse action” such as a higher rate. If this occurs, review your credit report immediately and contest any mistakes you discover.
Shop around. Each insurer has its own pricing algorithm, so compare quotes from at least three firms to ensure you’re getting the best bargain. Barlow recommends partnering with an independent insurance agent who will shop around for you.
Check for discounts. According to Alan Umaly, president of Westwood Insurance Agency, you might save money by consolidating your renters and car insurance policies with the same carrier or informing your insurer that your home has an alarm system. Other savings may be available if you pay in full up front or set up autopay.
Increase your deductible. A deductible is the amount deducted from your insurance payout if you ever make a claim. Choosing a greater deductible will lower your premium, but it may not be worthwhile if you won’t be able to cover it in the event of a claim.
Improve your credit. Paying bills on time and lowering debt might help you develop credit and eventually qualify for lower insurance premiums. For example, you could attempt submitting your rent payments to the credit bureaus.
