Every homeowner should carry homeowner’s insurance, even if your home is completely paid off. It protects your investment and protects you with liability coverage in case you get sued by a guest at your home.
And if you’re paying a mortgage, it’s likely that your mortgagee — the bank or institution who owns the loan — requires homeowner’s insurance coverage.
If you’re looking to buy the best homeowner’s insurance for bad credit, you’ll need to do some research and shop around. While you’re waiting for insurers to contact you with quotes, it’s a perfect time to check your credit score. That may sound like a lot of work, but it can save you hundreds — possibly thousands —of dollars every year.
Shopping for Homeowner’s Insurance When You Have Bad Credit
This unbiased article explains all you need to know about buying homeowner’s insurance with bad credit. We’ll answer your most frequent questions like:
- Do insurance companies consider a credit score when quoting insurance prices?
- How do insurance companies learn about credit history?
- How do collection agencies work?
- What’s the best way to shop for homeowner’s insurance with bad credit?
- How do insurance companies decide on a valuation for a home?
- How can I save more on homeowner’s insurance with bad credit?
And more, like the difference between actual cash value, replacement cost and extended replacement cost policies.
Do Insurance Companies Consider Your Credit Score When Quoting Homeowner’s Insurance?
Sometimes, yes. As of late 2022, seven states allow insurers to consider a consumer’s credit score when creating a risk rating. They are:
- And Oregon
In those states, 85% of the homeowner’s insurance companies will use a consumer’s credit information when calculating risk groups and premiums, and 95% of auto insurers do the same, per the National Association of Insurance Commissioners (NAIC).
Therefore, if you live in one of those states you can be confident that your credit history is affecting your price for all kinds of insurance.
If you live in any of the other 43 states, you don’t need to worry. Insurers aren’t allowed to consider your credit history when deciding your premium.
How Do Insurance Companies Learn About Your Credit Score?
Three primary organizations in the US monitor consumer credit. They report their findings to financial institutions, creditors and insurance companies. They are:
Any insurer can contract with any of those bureaus to learn about your credit history. But know that insurance companies also keep meticulous records on consumer behavior, claims, rates, and risk. They share these databases with one another. So, if one insurer knows you have poor credit, they probably all know.
If you’re looking to save money on homeowner’s insurance or auto insurance, and you live in one of the states listed above, you should investigate your credit rating and take a proactive approach to fixing any problems. Pay bills on time, pay down your debts as much as possible, and make sure no one is stealing your identity and creating unpaid debt.
You’ll probably need to deal with some collection agencies to improve your credit.
How Do Collection Agencies Work?
Collection agencies buy debt for a fraction of amount due, and then try to collect more money than they spent. So, you can try to settle older, larger debts with a call to the collection agency or credit bureau that’s reporting it. For instance, if you owe a $500 medical bill from three years ago, you can contact them and ask to accept a smaller sum, say $300.
Just know that any information you choose to give them — like an updated email address or cell phone number — can be used by them to try collecting a debt.
And, collection agencies have a reputation for collecting debts and then forgetting to notify the credit reporting agencies. That’s another reason it’s so vital to stay on top of your credit report.
Now you’re thinking, “I know all this. I’m working on paying down my debts, but I still need a great deal on homeowner’s insurance for people with bad credit. What’s next?”
Let’s explore some tips for shopping for homeowner’s insurance with bad credit.
How to Find the Best Homeowner’s Insurance When You Have Poor Credit
To find the best homeowner’s insurance with bad credit, know how much coverage you need and the type of coverage you’re hoping to buy.
Defining “the Best” Homeowner’s Insurance Policy for Individuals with Bad Credit
First, let’s think about how you define “the best” property insurance. Price is almost always a key consideration, especially if you’re struggling financially at the moment, so have your budget in mind.
Then, think about other points of a homeowner’s insurance policy that matter, like the:
- Total amount of coverage you need, usually called Coverage A
- Contents coverage, which is a set percentage of Coverage A, and pays for your belongings after a covered loss
- Liability coverage, which protects the homeowner if they get sued by a guest
- And specific coverage for specialty items like artwork, musical equipment or jewelry
Another key consideration is the difference between replacement cost coverage (RC), extended replacement cost coverage (ERC), and actual cash value coverage (ACV) on a policy.
RC, ERC and ACV Explained
Regardless of your credit situation, all homeowner’s insurance policies in the US are built on the notion of fire coverage. Put another way, if your insured home burns down, you — or the mortgagee who has your mortgage — can collect funds and be made whole after the financial loss.
Beyond the structure itself, HO policies supply more funds for things like other structures (OS), contents coverage, and debris removal. A home insured for $100,000 that completely burns down might net a check worth $175,000!
But often, homes don’t burn down entirely. In insurance-speak, we call this a partial loss. For instance, imagine a kitchen fire in your home right now. You dial 911, the fire department comes quickly, and they’re able to save most of the house. The insurance adjuster calculates the depreciation of your belongings, and says the destroyed cabinets, appliances, flooring and roof equal $40,000 of damage.
Replacement Cost Policies
If you have a replacement cost policy, the insurer will pay the $40,000 to repair and replace everything, less your deductible. Some homeowners discover this a frustrating point if labor and material costs are higher than usual. For example, cabinets you paid $15,000 for in 2001 might cost $30,000 to replace today. Flooring, roofing, and labor all cost more these days, so a homeowner might be forced to repair their home with lower quality materials.
Extended Replacement Cost Policies
With an extended replacement cost policy, the insurer will pay more after a covered loss. Sometimes that amount is a set percentage, like 10% or 20% more than the agreed coverage amount. Other times, an RCV policy will pay to replace your belongings exactly, regardless of price.
If you have expensive marble floors, custom cabinetry, or other high-end materials in your home, you’ll be best protected with an ERC policy.
Actual Cash Value Policies
Actual cash value policies pay the least in a claim like this. In these instances, the depreciated value is considered most important. So, your 20 year old cabinets might only be worth $2,000. The homeowner will need to find replacement cabinets at that price.
RC and ERC policies are becoming the standard for homeowner’s in the US, and when you contact an agent to talk about homeowner’s insurance for someone with bad credit, they’ll usually offer you an RC or ERC policy.
However, if you’re struggling financially, you can ask about an ACV policy, assuming your mortgagee allows it.
Are ACV Homeowner’s Insurance Policies Obsolete?
Some agents feel ACV homeowner’s insurance policies are obsolete, considering the supply chain struggles and labor cost increases we’ve seen in the last few years. But they are still available, and they are always more affordable.
As a consumer, you must be aware of the difference. Ask your agent to explain which type of coverage they’re offering, and how much they will pay to replace your belongings after a partial loss. The low monthly premiums might be attractive, but you might be left stranded after a partial loss like the kitchen fire we described above.
Coverage A: Home Valuations Explained
Sometimes, people shopping for homeowner’s insurance with bad credit try to insure their home for a lower overall value.
Imagine, for instance, an older couple who paid $65,000 for their home back in 1975. They’ve taken great care of the home and the neighborhood has a lot of new housing. When shopping for insurance, agents value their home at $200,000. The couple is confused and concerned, because they don’t believe their home is worth that much.
Understand that Coverage A, the valuation on your home, describes what it would cost to build a brand new home if yours were to burn down.
Insurance agents use a formula to create an estimated replacement cost for your home. That formula considers many factors, like:
- Square footage
- Building materials
- HVAC systems
- The roof type
- Your location
- And the cost to rebuild other homes in your neighborhood after a claim
Thinking about the senior couple in our example, they might be happy with a policy that values their home at $100,000. They feel they’d live well in an apartment on those funds if the house burns down. And an insurance company might agree to that valuation.
How to Save Money on Homeowner’s Insurance with Bad Credit
For homeowners with bad credit, there are other ways to save a few bucks on your insurance. First, consider increasing your deductibles.
Consider Your Deductible Amount
A deductible is the amount of money a homeowner will pay to repair a home after a covered loss. If your kitchen burns down and you have a $1,000 deductible, the insurer will expect you to pay the first $1,000 of any repairs.
You can save a lot on monthly premiums by increasing your deductible from $1,000 or $2,500 to $5,000 or more. Of course, your mortgagee might require a specific deductible, so you need to follow their rules. And, many people don’t always have $5,000 cash or credit available to pay for repairs, so this isn’t always a great angle.
Shop Around for Homeowner’s Insurance Every Few Years
Insurance companies tend to slowly inch up their prices over time. If you’ve been with the same insurer for many years, get some quotes from others. They might offer you a very competitive price to get your business.
Ask About Discounts
Property insurance companies have been aggressively marketing discounts in recent years. So contact your insurer and ask what discounts might apply to your family.
You might pay a lower premium for:
- A claims-free history
- Professional certifications
- Upgrades to your home like security systems, a new roof, or new plumbing
“Bundle” Your Insurance Products
If you have several lines of insurance, like life insurance, motorcycle insurance and auto insurance, you might save on your homeowner’s policy by using one company for all of them. It’s called “bundling” and you’ve probably seen Progressive’s advertising about it.
Beyond price, there are a few more benefits to bundling. Some consumers like dealing with a single agent or paying the bills using only one website.
Still, there are a few caveats to consider when bundling insurance products to get a better price on homeowner’s insurance with bad credit. When all your policies are with one company, it can be a real hassle if you’d like to change. And if your rates go up on one policy — if your auto insurance increases after an accident, for instance — you will lose the discount on your homeowner’s policy should you move the auto insurance to a new provider.
Ultimately, if you’re in one of the states that allows insurers to consider your credit rating, the best thing you can do is shop around regularly and stay on top of your credit as much as possible. Once your score improves, shop around again.