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Credit score effects on home insurance premiums

When you apply for a mortgage from major financial institutions, one of the factors that they look at before approving applicants is your credit score. Much like mortgage providers, some home insurance providers will also look at your credit score to determine how much your insurance premiums will be. Unlike with mortgages, credit scores determine the costs of the premiums rather than confirmation of getting the insurance. Regardless, having home insurance is important to understand in your homebuying and homeowning journey. 

A client listening to a mortgage agent

Understanding home insurance

Your home is the most valuable asset that you own if you are like the majority of Canadian homeowners. As with most valuable items, you want to protect it, and homeowners can do so with home insurance. While you are not required by law to insure your home, unexpected events do occur, and having home insurance could potentially protect you against a devastating loss. If you have a mortgage loan then home insurance will be a requirement for the mortgage. Depending on your specific insurance policy, you could be covered when 

  • your home gets broken into. 
  • your property causes accidental damage. 
  • your home gets damaged by fire, flood, and other natural phenomena. 
  • your property accidentally causes injury.  

In Canada, you can find home insurance from several providers, including major financial institutions and private providers. Finding the right provider may feel like a length process, but choosing one who understands your situation and gives you the best deals is worth the time.  

What is home insurance premium?

Whenever you choose to buy insurance for your assets, that payment is also referred to as a premium, but it operates in an unconventional way. At the start of your insurance policy agreement, you’ll have to pay how much the policy is worth.  

The cost of your premiums depends on several factors: 

  • Past claims – if you have made previous claims your premiums will likely go up. 
  • Location—different neighborhoods have their own reputation, which can either be good or bad. Riskier neighborhoods are likely to have higher premiums. 
  • Proximity to a fire station—the price of premiums will be more reasonable if your property is close to a fire hydrant or station.  
  • Age of structure—the building’s age increases along with the premium because more worn-down structures are susceptible to accidents.  
  • Heating and cooling systems—Canada has different sources of heat including oil, gas, and electrical. Having oil-based heating systems can increase your premium. 
  • Electrical system—fuses and older wiring can increase the costs of premiums because of their potential to create fires. 
  • Type of basement—some basements can be refurbished to allow for tenants while others are just storage space. What yours is can change the total cost of your premium. 
  • Type of coverage—not every homeowner will buy the same insurance policy with the same coverages. You will have a different personal bundle than to your own neighbor. 
  • Type of home—condominiums have different insurance coverage, and therefore a different premium cost.  

How credit score is normally calculated

Credit grantors like banks, credit unions, loan companies, credit card companies, l easing companies, all submit reports about your loans and credit cards to Credit Reporting Agencies that are often referred to as Credit Bureaus. Most credit scores are reflective of your credit activity for the previous seven to ten years. They show how you have treated the culmination of the loans and credit cards you’ve been entrusted with. A higher score means that you have good creditworthiness and are more favorable in the eyes of financial institutions.  

There are five components that affect your credit score: 

Available credit- the number of loans and credits cards will account for about 10% of your credit score. Two to three credit cards, a car loan or line of credit and a mortgage is ideal, too many trade lines will negatively affect this part of the score. 

New credit applications– the number of credit applications you have in a 12-month period will account for about another 10% of your credit score. Don’t apply for credit unless you need it.  

Payment- paying your bills on time accounts for about a third of your credit score. Pay your bills on time every month.  

Credit utilization- managing the use of your credit limits will account for around another third of your credit score. Keep your balances below 30% if possible and try not to put charges on your credit cards unless you can pay them off in full at the end of the month. If you cannot pay them off in full at the end of the month, pay as much as you can above the minimum payment. 

Credit history- a history of late or missed payments, bankruptcy or consumer proposals can negatively impact your score for up to 7 years. Pay on time and at least the minimum amount. 

The relationship between credit score and insurance premiums

Generally, your credit score shouldn’t have as much influence on your premiums as much as the aspects of your property do. Even so, some insurance providers prefer to look at a person’s credit history before offering a final total for the insurance policy. For some homeowners, credit checks work out in their favour because they could qualify for discounts when they have strong credit scores. On the other hand, policyholders who have credit scores on the lower end of the scoreboard may be charged more interest on their premiums.  

Even though credit scores can have an effect on the cost of your premium, credit checks vary between provinces and individual insurance providers. Those that do use credit scores to develop an insurance score, but it has the same purpose as a credit score. They both indicate how well you manage your current finances and determine your creditworthiness.  

Higher credit scores, lower premiums

Just like with other financial aspects, higher credit scores can bring you more advantages. To receive more benefits, many Canadians make it their goal to increase their credit score to more than 700 points. To do so, you can focus on acquire some new financial habits. 

  • Pay more than the minimum— pay your credit card balance off in full at the end of the month if possible. Your credit card statement determines the minimum amount that you need to pay towards it. Pay as much over the minimum as you can as this can make a difference. 
  • Set up auto payments—missing payments can lead to lower credit scores, so setting up automatic payments will keep your from accidentally missing any.  
  • Decrease your credit lines—if you have credit cards you’re no longer using, cutting them would help boost your credit score. Do try to keep your oldest credit card since that’s usually the best indicator of your creditworthiness. Keep at least two credit cards. The credit cards you are not going to keep, pay them to zero balance and notify the credit card company in writing that you would like to close the account and send a copy of the letter or email to the credit reporting agencies so they can note your report that you closed the accounts and not the credit grantor. Then check 30 days later to make sure the balance is zero, sometimes extra interest can still be owed. You must pay this so it doesn’t go as an unpaid balance, even $1 dollar left unpaid can severely damage your score over time.   
  • Pay off higher-interest loans after making sure you are making payments to all your loans and credit cards, target any extra payments to your highest interest rate loans first. This will minimize the interest you pay and allow you to pay off your credit sooner. 

Conclusion: home insurance premiums and your credit score

Home insurance is an important aspect of homeownership. While not mandatory unless you have a mortgage, having it could save you thousands of dollars in property damage or liability costs. Home insurance works by charging homeowners premiums, and the monthly costs of a premium can vary between individuals based on their home and their credit score. To potentially get the best-case scenario for you and your home, you can increase your credit score, but each provider is different. 

With Newfoundland and Labrador rolling out legislation banning the use of credit scores to determine premium interest rates, other provinces like Ontario and Alberta are also following suit. As you are searching for home insurance providers, confirm that they are allowed to access that information before granting them that access. 

Frequently Asked Questions

A good credit score is defined by the financial institution using it, however, in general, anything over 600 is average, 700 and above is good and 800 and above is excellent.  In insurance, credit score influences how much a person’s monthly premium will be, but the insurance company will ultimately decide what counts as a good credit score. 

Credit score influence and home insurance premiums vary between provinces in Canada. In Newfoundland and Labrador, insurance companies are not permitted to use your credit history to determine both auto and home insurance premiums. On the other hand, Alberta and Ontario do use credit scores on home insurance premiums, but not car insurance.

If you believe that you are paying an unfair amount of premium on your insurances, one thing you can do is switch to a different company. Several insurance companies do not conduct a credit check, and you may find more accommodating solutions with alternative options. The other thing you can do is a file a complaint. If your provider is federally regulated, you can submit your case on the official Canada site 

If your credit score increases, your premiums may decrease as well. You may not see it reflect right away, and you might have to wait until you renew your insurance policy or switch providers. In general, aiming to raise your credit score will not only lead to lower premiums but also lower interest rates