A poor credit score doesn't just make it difficult to qualify for a mortgage loan, but also raises home insurance costs for owners, a new study has found.
The study was conducted by insuranceQuotes.com, an online portal that allows one to compare insurance rates, which analyzed the effect of credit scores on homeowners insurance.
According to Investopedia, credit score is a number derived from a person's credit history that includes - payment history, amount owned, and length of credit history, new credit and types of credit used. Credit scores range from 300 to 850 and the higher the number, the better the person's score. A person needs to have a credit score of over 600 to qualify for a mortgage.
The research found that 91 percent of the homeowners who had a poor credit score had to pay higher insurance rates when compared to those with good credit scores.
Why? Because a poor credit score makes you a risky customer.
"This is another example of why credit is such an important part of your financial life," Laura Adams, senior analyst with insuranceQuotes.com, told CNBC.
"Maintaining a good credit history suggests that you're a less risky customer and can lead to several hundred dollars in annual homeowner's insurance savings," Adams added.
But they added that the insurance evaluation differs from state to state.
"For one thing, not all insurers write policies in every state. So an insurer that heavily weighs (credit-based insurance scores) in one state might not write policies in another. And secondly, insurers may find that credit scores make a bigger difference in some states as opposed to others," Mike Barry, a spokesman for nonprofit Insurance Information Institute, was quoted in the study.
Usually, insurance companies use the FICO's - Fair Isaac Corp. - a credit monitoring firm, insurance rating that gauges scores through a combination of factors.
While California, Maryland and Massachusetts prohibit insurance companies from taking credit scores into account, these are the states where a poor credit score has the largest impact on insurance rates:
More recently, FICO announced that it will no longer fine borrowers for certain debt activities. The National Association of Realtors lauded the firm's decision saying that it would encourage more Americans to buy homes.
"This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores," Steve Brown, NAR president, was quoted by PleasantonWeekly.com.
Having a good credit score is of utmost importance because it affects your finances in several ways.
Even paying your rent on time can boost credit scores. Read on to find out how.
