The Relationship Between Credit Scores and Insurance Premiums

Your credit score is more than just a measure of financial responsibility—it can also affect how much you pay for insurance. Many insurance companies use credit-based insurance scores to determine premiums for auto, home, and even some life insurance policies. Here’s how your credit score influences your insurance costs and what you can do to improve your rates.

How Credit Scores Impact Insurance Premiums

Insurance companies use credit scores to assess risk. Studies have shown that people with lower credit scores tend to file more claims, leading insurers to charge higher premiums to offset potential losses.

1. Credit-Based Insurance Score vs. Traditional Credit Score

• Credit Score: Used by lenders to determine loan eligibility and interest rates.
• Credit-Based Insurance Score: Used by insurers to assess risk and set premium rates.
• Similarities: Both consider payment history, debt levels, credit history length, and new credit inquiries.
• Differences: Credit-based insurance scores focus on financial behaviors that indicate potential claim risks rather than borrowing ability.

2. Why Do Insurers Consider Credit Scores?

• Insurers believe lower credit scores indicate higher financial risk, making a policyholder more likely to file claims.
• Those with higher credit scores tend to file fewer claims, leading to lower premiums.
• Many states allow credit-based pricing, but some states (e.g., California, Massachusetts, and Hawaii) prohibit or limit its use in auto insurance pricing.

Types of Insurance Affected by Credit Scores

1. Auto Insurance

• Drivers with low credit scores often pay significantly higher premiums than those with excellent credit.
• Even if you have a clean driving record, a poor credit score may still increase your costs.

2. Homeowners Insurance

• A lower credit score may indicate a higher likelihood of filing claims, leading to increased home insurance premiums.
• Maintaining a good credit score can result in discounts and lower rates.

3. Life Insurance

• While not as common, some life insurance providers may consider credit history during underwriting.
• Insurers might use credit scores as part of a larger financial assessment.

How Much Can Your Credit Score Affect Your Insurance Rates?

• A person with a poor credit score could pay 50%-100% more for insurance compared to someone with an excellent credit score.
• On average, improving your credit score from "poor" to "excellent" can save you hundreds of dollars per year on premiums.

How to Improve Your Credit Score and Lower Insurance Premiums

1. Pay Bills on Time

• Payment history is the biggest factor in credit scoring (35%).
• Set up autopay or reminders to avoid late payments.

2. Reduce Credit Card Balances

• Keep your credit utilization below 30% of your credit limit.
• Paying off debts can improve your score and lower insurance costs.

3. Avoid Too Many Credit Inquiries

• Applying for multiple credit accounts in a short period can lower your score.
• Only apply for new credit when necessary.

4. Check Your Credit Report Regularly

• Review your report for errors and dispute inaccuracies.
• Get free annual credit reports from AnnualCreditReport.com.

5. Build a Long Credit History

• Older credit accounts help improve your score.
• Avoid closing old credit accounts unless necessary.

6. Ask Your Insurer About Discounts

• Some insurers offer loyalty discounts or lower rates if you bundle policies.
• Improving your credit score could make you eligible for better rates at renewal.

Conclusion

Your credit score plays a significant role in determining your insurance premiums. A higher credit score can lead to lower insurance costs, while a lower score may result in higher rates. By improving your credit habits—paying bills on time, reducing debt, and monitoring your credit report—you can potentially save money on insurance and improve your overall financial health.

If your credit score is low, consider shopping around for insurers that weigh credit scores differently or offer alternative pricing methods.