Homeowners are often surprised that their insurance company wants to run a credit check before providing a homeowners insurance quote, but this is a common practice among insurers. Bankrate reports that 85 to 90 percent of insurers use an insurance score when determining premiums, and insurance scores are largely based on credit scores -- and insurance scores can be improved by improving credit scores. If you have credit cards, here's how paying them bimonthly could improve your credit score and help you qualify for lower homeowners insurance quotes.
Credit Scores are Used in Most States
Except for Maryland, California and Massachusetts, which have laws against the practice, all other 47 states and the District of Columbia let insurers factor in credit scores when determining insurance rates.
In one other state, Florida, insurance companies are allowed to consider credit scores, but the scores have little effect on homeowners insurance premiums. The Insurance Journal explains that Florida's homeowners insurance rates are the highest in the country, because hurricanes are so common in the state. Since natural disasters are so prevalent, the homeowners' credit scores are less significant when determining insurance rates in the state.
5 Factors Affect Credit Scores
There are five factors that affect credit scores, and a different weight is given to each. According to MyFICO, they are the following:
- payment history (35 percent of score)
- amounts owed (30 percent of score)
- length of credit history (15 percent of score)
- new credit (10 percent of score)
- credit mix (10 percent of score)
By paying your credit cards twice a month, you can improve the two most significant factors, your payment history and amounts owed. Together, these account for almost two-thirds of your credit score.
You'll Make Payments on Time
First, making two payments each month will ensure that you aren't penalized for missing a payment due date. If you regularly miss payments because you forget to submit them, setting up two payments will reduce how often this happens. Even if you're meticulous about bills and don't often miss one, scheduling two payments will ensure you don't miss one if you go on vacation or have an emergency, and forget about a bill.
You'll Lower Your Amounts Owed
By making credit card payments, you'll, of course, reduce your amounts owed. Specifically, you'll reduce your debt-to-credit ratio, which is a component of your amounts owed. Your debt-to-credit ratio is figured by dividing your total debt load over by your total available credit.
For example, assume you have $2,000 of available credit on a card, and this is your only line of credit. If it's maxed out, and you're carrying a balance of $2,000, then your debt-to-credit ratio would be 1 ($2,000 / $2,000 = 1). If you have a balance of $1,000, then your ratio would be 0.5 ($1,000 / $2,000 = 0.5). If you only have a balance of $200, your ratio would be 0.1 ($200 / $2,000 = 0.1).
Your debt-to-credit ratio is calculated monthly, based on the available credit and existing balance that your creditors report. By making bimonthly payments on your credit cards, you can lower your ratio. As long as you spread out the two payments over the course of a month, one will be made shortly before your data is reported. Thus, the balance that your credit card holder reports will be slightly lower, and your ratio will be a little better.
By improving your debt-to-credit ratio, you'll improve the second-most-important factor used to calculate your credit score. At the same time, you'll also be making your payments on time, which is the most important factor. Soon, this will have a positive effect on your credit score, and you may be able to qualify for lower homeowners insurance rates. To do this, you don't even need to pay more on your credit cards than you are now -- you just need to split your payments into two monthly payments, then reach out to an insurance company like Southern Family Insurance.