How your credit score affects your insurance premiums

You shop for car insurance, get a few quotes, and the numbers are all over the place. You assume the differences are based on your driving record, your age, or the car you drive. But one of the most powerful factors influencing your premium is one you might never see mentioned on the quote: your credit score.

It feels strange, doesn’t it? What does your financial history possibly have to do with your chances of getting in a car accident or your house flooding?

The answer is: a lot.

For decades, insurance companies have been using a “secret” score, derived from your credit report, to set your premiums for auto, home, and renters insurance. And the difference between having “excellent” credit and “poor” credit can be staggering—often amounting to a penalty of thousands of dollars per year.

This article pulls back the curtain on this controversial practice. We’ll explore what this score is, why insurers use it, how much it’s really costing you, and—most importantly—what you can do about it.

What Is a Credit-Based Insurance Score? (And How Is It Different?)

First, let’s clear up a major point of confusion. The score your insurance company uses is not the same FICO or VantageScore score that a mortgage lender or credit card company pulls.

Instead, they use a credit-based insurance score (CBIS).

• Same Data, Different Formula: This score is generated from the exact same data on your credit report (from Experian, Equifax, or TransUnion). However, it uses a different, proprietary algorithm.
• Predicting Risk, Not Repayment: Your FICO score is designed to predict one thing: the likelihood that you will pay back a loan. A credit-based insurance score is designed to predict something else entirely: the likelihood that you will file an insurance claim.

While the exact formulas are a closely guarded secret, the factors that go into them are well-known. A company like FICO or LexisNexis will take your credit report data and run it through their insurance-specific model to generate a risk score for the insurer.

The Big “Why”: Why Do Insurers Insist on Using Your Credit?

This is the central question, and the answer is based on one word: data.

Insurers are in the business of risk. To set a premium, they must predict how likely a person is to cost them money. Decades ago, they fed millions of customer data points into computers and found a powerful, undeniable statistical link.

The core finding: People with lower credit-based insurance scores (indicating poorer financial management) file significantly more claims than people with higher scores.

This is a correlation, not necessarily a causation.

• Having a high credit card balance doesn’t cause you to run a red light.
• Missing a loan payment doesn’t cause a pipe to burst in your basement.

So, what’s the logic? Insurers and data scientists offer a few theories:

• The Responsibility Argument: The (debatable) theory is that a person who is responsible and meticulous with their finances (e.g., pays bills on time, doesn’t over-leverage) is also more likely to be responsible in other areas of life. They might be more likely to get their car’s oil changed, fix a leaky faucet before it floods, or drive more defensively.
• The Financial Stress Argument: This theory suggests that individuals under financial stress (which is reflected in a poor credit report) might be more inclined to file small, “borderline” claims to get a payout. They might also defer critical maintenance—like replacing bald tires or fixing a loose roof shingle—which leads to a much bigger (and preventable) claim down the road.
• The “It Doesn’t Matter Why” Argument: From the insurer’s perspective, the “why” is academic. The data is so predictive that they would be at a competitive disadvantage not to use it. If Insurer A ignores credit and Insurer B uses it, Insurer B can offer much lower rates to “low-risk” (good credit) customers, stealing them away. Insurer A would be left holding a portfolio of “high-risk” (bad credit) clients and would have to raise rates for everyone.

How Much Can a Poor Credit Score Really Cost You?

The impact of your credit score on your insurance premium is not a small rounding error. It is one of the most significant factors in the equation.

According to multiple consumer-data studies:

• Auto Insurance: Drivers with “poor” credit often pay twice as much (or more) as identical drivers with “excellent” credit. In many states, the financial penalty for having bad credit is higher than the penalty for having a DUI or an at-fault accident on your record.
• Homeowners Insurance: The story is similar. A homeowner with “poor” credit could see their annual premium jump by 90% to 120% compared to a homeowner with “excellent” credit.

Let’s put that in real numbers. If the base rate for a good driver with excellent credit is $1,500 per year, that same driver with poor credit could be quoted $3,000 to $3,500 per year. That’s an extra $125-$160 every single month for the exact same coverage, simply because of their credit history.

This “credit penalty” is a massive, invisible surcharge that millions of Americans are paying.

Which Insurance Products Are Affected by Your Credit?

This practice is widespread, but it doesn’t apply to every type of insurance.

1. Auto Insurance

This is where you’ll feel the biggest impact. Nearly every auto insurer in the country uses credit as a primary rating factor, except in the few states where it’s banned.

2. Homeowners & Renters Insurance

This is a close second. Insurers use your credit to predict your likelihood of filing a claim for things like fire, theft, or water damage. As mentioned, the logic is that a person in financial distress may be less likely to perform regular maintenance, leading to more (and larger) claims.

3. What About Life Insurance?

The link here is less direct. A life insurance underwriter won’t just plug in your score to get a rate. However, they will review your entire financial history. A poor credit report, especially one with a recent bankruptcy or massive, unmanageable debts, can be a major red flag. It suggests financial instability and high stress, which underwriters may associate with other health and lifestyle risks. It won’t stop you from getting a policy, but it could prevent you from getting the best “Preferred” rates.

4. What is NOT Affected? Health Insurance

This is one area where you are completely protected. The Affordable Care Act (ACA) explicitly prohibits health insurance companies from using your credit score to set your premiums or determine your eligibility for coverage.

The Great Debate: Is Using Credit for Insurance Fair or Discriminatory?

This practice is, to put it mildly, extremely controversial. There are very strong arguments on both sides.

The Argument AGAINST Using Credit (Consumer Advocates)

• It Punishes the Poor: Critics argue this is a system that “kicks people when they’re down.” It disproportionately harms low-income individuals, minorities, and young people who haven’t had time to build a credit history.
• Life Events Are Unavoidable: A person’s credit can be destroyed by events that have nothing to do with their personal responsibility. A medical emergency, a job loss during a recession, or a messy divorce can lead to medical debt and collections, tanking their credit score. This system punishes them with higher insurance rates for years, even if they are the safest driver in the world.
• It Creates a “Downward Spiral”: If you lose your job, your credit drops. Because your credit dropped, your car insurance bill doubles. Because you can’t afford the new bill, you might be forced to drive uninsured (illegally) or give up your car, making it even harder to find a new job. It’s a financial trap.

The Argument FOR Using Credit (Insurers & Regulators)

• The Data is Predictive: Insurers argue this isn’t about judging someone; it’s about pricing risk. The data shows the correlation is real and powerful.
• It’s a “Risk-Based Pricing” Tool: The core principle of insurance is to charge each person a rate that accurately reflects their risk.
• It Benefits the Majority: Insurers claim that not using credit would mean that responsible, low-risk (good credit) clients would have to pay more to subsidize the higher claims of high-risk (bad credit) clients. They argue this system is fairer because it gives a significant discount to the majority of consumers who manage their finances well.

The Legal Landscape: Is This Practice Even Allowed?

Yes, in most of the country. The use of credit-based insurance scores is legal and regulated in most states.

However, a few states have taken a stand against it.

• California: Bans the use of credit scores for setting auto and home insurance rates.
• Massachusetts: Bans the use of credit scores for auto insurance (but allows it for home insurance).
• Hawaii: Bans the use of credit scores for both auto and home insurance.
• Maryland: Allows it for home insurance but prohibits it for auto insurance.
• Michigan & Utah: Have some restrictions on how much credit can be used as a factor.

In all other states, it is a standard and powerful factor in your premium.

What Exactly Are Insurers Looking At in Your Credit Report?

Since the insurance score formula is different, it also weighs certain factors differently than a lender’s FICO score.

What They LOVE (Positive Factors):

• Long-Standing, On-Time Payment History: This is, by far, the most important factor. A long history of paying your bills on time is the best indicator.
• Low Credit Utilization: Having low balances on your credit cards (e.g., below 30% of your total limit) shows you are not over-extended.
• Long Credit History: Having accounts open and in good standing for many years is a positive.
• A Healthy Mix of Credit: Having different types of credit (like a mortgage, a small auto loan, and a few credit cards) is viewed positively.

What They HATE (Negative Factors):

• Missed Payments & Collections: Any late payments, accounts sent to collections, or public judgments are major red flags.
• High Credit Utilization: Maxed-out credit cards are a strong negative indicator.
• Short Credit History: A “thin” or new credit file is considered riskier.
• Numerous Recent Inquiries: Applying for a lot of new credit in a short time suggests financial distress.
• Bankruptcies: This is one of the most severe negative items.

How to Lower Your Insurance Costs by Boosting Your Credit Score

This is the good news. You have the power to change this. Improving your credit score is one of the single best ways to lower your insurance premiums—it’s like giving yourself a “good driver” discount.

Here is your step-by-step action plan:

1. Pay Every Single Bill on Time. This is non-negotiable and the most heavily weighted factor. Set up automatic payments for your minimums so you are never late.
2. Attack Your Credit Card Balances. Focus on your “credit utilization ratio.” If you have a credit card with a $10,000 limit and a $9,000 balance (90% utilization), your score is being crushed. Make it a primary goal to pay that balance down, ideally below 30% ($3,000).
3. Check Your Credit Report for Errors. Get your free annual credit reports from AnnualCreditReport.com. Go through them line by line. Is there a collection account you don’t recognize? A late payment that was actually on time? Dispute every single error. Getting a single negative item removed can boost your score significantly.
4. Keep Old Credit Cards Open. Don’t close that old credit card you never use (as long as it doesn’t have an annual fee). That card’s long history is helping your “average age of accounts,” which boosts your score.
5. Be Strategic About New Credit. Don’t apply for a new store card every time you’re offered a 10% discount. Every “hard inquiry” can temporarily ding your score.

What If You Need Insurance NOW With a Bad Credit Score?

Fixing your credit takes time, and you need affordable insurance today. You are not stuck.

• Shop, Shop, and Shop Again. This is the #1 strategy. Every insurer uses a different proprietary algorithm. One company might weigh your credit very heavily, while another may weigh it less, caring more about your driving record. The only way to find this out is to get quotes from at least 5-7 different companies (both large national brands and smaller, local ones).
• Look for “Telematics” (Usage-Based Insurance). This is a game-changer. Programs like Progressive’s Snapshot, Allstate’s Drivewise, or State Farm’s Drive Safe & Save use an app or a small device to track your actual driving habits—like braking, acceleration, time of day, and phone use. If you are a genuinely safe driver, these programs can give you a massive discount, proving your safety and bypassing the “risk” assumption from your credit score.
• Increase Your Deductible. Raising your deductible from $500 to $1,000 (or $2,000 for home insurance) will immediately lower your premium. You are taking on more “skin in the game,” but it’s a trade-off that can save you a lot of money (just make sure you have that deductible amount saved in an emergency fund).
• Bundle Your Policies. Most companies give a significant discount (10-25%) if you bundle your auto and home/renters insurance with them.
• Ask for Other Discounts. Don’t forget the basics. Are you eligible for a good student discount? A defensive driving course discount? A discount for your car’s safety features? Ask your agent to review every possible discount.

Take Control of Your Financial Footprint

The link between your credit and your insurance premiums isn’t a myth—it’s a powerful and costly reality. While the fairness of the practice is debatable, its impact on your wallet is not.

But this knowledge is power. Unlike your age or your driving history (which can’t be changed overnight), your credit score is something you can actively improve.

By viewing your credit report as a vital financial tool—one that affects not just your loan rates but your everyday expenses—you can take the steps to improve it. Paying your bills on time and reducing your debt isn’t just good financial practice; it’s the key to unlocking hundreds, or even thousands, of dollars in insurance savings every year.