If you’ve ever shopped for insurance and wondered why your rates are higher than expected, your credit score might be the culprit. Most people associate credit scores with loan applications and credit card approvals, but insurance companies often use your credit score to assess risk and determine premiums. Understanding this connection—and learning how to improve your score—can make a big difference in your insurance costs.
Let’s explore why your credit score matters to insurers, how it impacts your rates, and practical steps you can take to boost your score and save money.
1. Why Do Insurance Companies Use Your Credit Score?
Insurance companies use your credit score because they believe it’s an indicator of your risk level. Statistically, people with lower credit scores are seen as more likely to file claims, miss payments, or engage in risky behavior, while those with higher scores are viewed as more responsible and financially stable.
- Credit-Based Insurance Score: This is slightly different from a regular credit score. While your FICO score looks at your ability to repay debt, an insurance score predicts the likelihood of you filing an insurance claim.
- Affects Several Types of Insurance: Your credit score can impact rates for auto, home, renters, and sometimes even health and life insurance.
- It’s Legal in Most States: While some states limit the use of credit scores for setting insurance rates, it’s still a common practice in most places. Exceptions include California, Hawaii, and Massachusetts, which prohibit the use of credit scores for auto insurance.
Takeaway: Insurers believe that a good credit score equals lower risk, leading to better rates. Conversely, a poor score could mean you’re seen as a higher-risk customer.
2. How Your Credit Score Impacts Insurance Rates
The connection between your credit score and insurance rates might not be intuitive, but it’s very real. Here’s how your credit score can affect what you pay:
- Higher Premiums for Lower Scores: People with lower credit scores can pay significantly more for the same coverage than those with excellent scores.
- Discounts for High Scores: A high credit score can lead to discounts or special rates. Some insurers offer their best deals to those with excellent scores, so maintaining a good score can unlock these opportunities.
- Tier-Based Pricing: Many insurers use a tiered system, where they place customers in categories based on their credit score. Higher tiers mean better rates, while lower tiers can lead to more expensive premiums.
Example: A driver with a credit score of 750 might pay $1,200 a year for auto insurance, while someone with a score of 600 could pay closer to $1,800 for the same coverage.
3. What Insurers Look for in Your Credit Report
Insurers don’t have access to your exact credit score, but they use a credit-based insurance score derived from similar factors. Here’s what typically influences it:
- Payment History: Late payments, collections, and bankruptcies can negatively impact your score.
- Credit Utilization: The amount of available credit you’re using is crucial. High balances can hurt your score, while keeping balances low is favorable.
- Credit History Length: The longer your credit history, the better. It shows lenders you have experience managing credit.
- New Credit: Opening too many new accounts in a short time can suggest financial instability.
- Credit Mix: A healthy mix of credit types (like credit cards, loans, and mortgages) can positively influence your score.
Insider Tip: Not all factors carry the same weight, but payment history and credit utilization tend to have the most significant impact on your score.
4. How to Improve Your Credit Score to Lower Insurance Rates
Boosting your credit score doesn’t just open up better loan terms—it can also help you score lower insurance premiums. Here’s how you can improve your score and save money:
Pay Bills on Time
Your payment history is the most significant factor affecting your credit score, so it’s crucial to pay bills on time, every time.
- Set Up Payment Reminders: Use calendar alerts or automatic payments to avoid missing due dates.
- Catch Up on Late Payments: If you’re behind, bring your accounts current as soon as possible. The longer you stay caught up, the less impact late payments have on your score.
Reduce Credit Card Balances
Credit utilization—the percentage of your credit limit you’re using—accounts for about 30% of your credit score. Keeping this ratio low can significantly boost your score.
- Pay Down High Balances: Focus on paying off high-interest cards first, but aim to reduce all balances below 30% of their credit limits.
- Ask for a Credit Limit Increase: If you have a good payment history, requesting a higher credit limit can instantly lower your credit utilization ratio without additional payments.
Pro Tip: Keep credit card balances below 10% of your credit limit for the best score boost.
Avoid Opening New Accounts Unnecessarily
Each time you apply for new credit, a hard inquiry is made on your report, which can temporarily lower your score.
- Limit New Credit Applications: Apply for new accounts only when necessary, and avoid opening several accounts within a short time.
- Monitor Your Credit: Use tools like Credit Karma or Annual Credit Report to keep an eye on your credit score and understand the impact of new accounts.
Keep Old Accounts Open
The length of your credit history contributes to your score, so avoid closing old accounts—even if you no longer use them.
- Keep Zero-Balance Cards Open: These accounts add to your available credit and lower your utilization ratio.
- Use Old Cards Occasionally: Make small purchases and pay them off to keep the accounts active without hurting your finances.
Takeaway: A long credit history with responsible use signals stability to insurers and can lead to lower premiums.
5. Shop Around for Insurance Quotes Based on Your Current Credit Score
Improving your credit score can take time, but even small improvements can make a difference. Once your score is in better shape, shop around to see if you can get a better deal.
- Get Quotes from Multiple Providers: Use online tools like The Zebra or Policygenius to compare rates from different insurers.
- Mention Your Credit Score Improvement: If your credit score has gone up, let your current insurer know. They might offer a better rate to keep your business.
- Ask for a Policy Review: Sometimes, your insurer can reassess your credit-based insurance score and adjust your premiums accordingly.
Pro Tip: Don’t just focus on the premium—consider the coverage levels, deductibles, and discounts when comparing policies.
6. Consider Insurance Companies That Don’t Use Credit Scores
While many insurers rely heavily on credit scores, some companies offer “no credit check” policies. These might be worth exploring if your credit score is low, but they can come with trade-offs:
- Higher Base Premiums: Policies that don’t use credit scores might have higher base rates to account for the increased risk.
- Limited Discounts: These companies may not offer as many discounts for safe driving or home safety features, so your options for savings might be limited.
- State-Specific Options: If you live in a state that restricts or bans the use of credit scores, research local options that offer competitive rates.
Takeaway: If your credit score is a barrier, non-credit-based insurers might be a temporary solution while you work on improving your score.
FAQs About Credit Scores and Insurance Rates
Q1: Why does my credit score affect my insurance rates?
Insurance companies believe that a lower credit score indicates higher risk for filing claims. A higher score suggests financial stability and lower risk, leading to better rates.
Q2: Can my insurance rates go down if my credit score improves?
Yes! Many insurers update their credit-based insurance scores periodically, so improvements in your credit score can lead to lower premiums.
Q3: Will checking my credit score impact my insurance rates?
No, checking your own credit score results in a “soft inquiry,” which doesn’t affect your score. However, applying for new credit can cause a “hard inquiry,” which might have a small temporary impact.
Q4: How often should I check my credit score when shopping for insurance?
Check your score before getting quotes and then annually. This helps you stay aware of any changes that could impact your premiums.
Q5: Are there states where insurers can’t use credit scores?
Yes, some states have restrictions or bans on the use of credit scores for certain types of insurance. For example, California, Hawaii, and Massachusetts do not allow credit scores to influence auto insurance rates.
