When it comes to managing your finances, most people are aware that a good credit score is crucial for getting approved for loans, securing low interest rates, and even renting an apartment. But one area that often surprises consumers is how credit scores can influence insurance premiums. Yes, your credit score can indeed affect how much you pay for car, home, and sometimes even life insurance. But how does this work, and why does it matter?
In this article, we’ll break down the connection between credit scores and insurance rates, how insurers use your credit-based insurance score, and what you can do to improve your rates.
What Is a Credit-Based Insurance Score?
First, it’s important to differentiate between your traditional credit score (like the FICO score) and a credit-based insurance score.
- Traditional credit score: Used by lenders to assess your ability to repay loans.
- Credit-based insurance score: Used by insurers to predict your likelihood of filing a claim.
Credit-based insurance scores are derived from the same credit report data but are calculated differently. They assess financial behavior that may indicate risk from an insurance perspective. This includes:
- Payment history
These scores do not consider your income, job, or demographic details like gender or race, as that would violate federal fair lending laws.
Why Do Insurance Companies Use Credit Scores?
Insurance companies argue that there’s a statistical correlation between a person’s credit behavior and the likelihood of filing an insurance claim. In simple terms: people with lower credit scores are considered more likely to file frequent or high-cost claims.
For example:
- A driver with a lower credit score may be more likely to get into an accident and file a claim.
- A homeowner with poor credit might delay routine maintenance, increasing the risk of damage and insurance claims.
Because of this, insurers use your credit score as one of many factors to calculate your premiums—along with age, driving history, location, vehicle type, and more.
How Much Can a Credit Score Affect Your Insurance Premium?
The difference can be dramatic.
According to a report from The Zebra, a popular insurance comparison website, drivers with poor credit can pay up to 100% more for car insurance compared to those with excellent credit.
Here’s an example from their data:And it’s not just auto insurance. Home insurance premiums can also increase significantly if your credit score is low. Some insurers may even deny coverage altogether if your credit score falls below their threshold.
Final Thoughts
Your credit score isn’t just about loans and credit cards—it can also directly impact your insurance rates. While insurers argue that credit scoring is a reliable way to assess risk, many consumers are unaware of this hidden cost. The good news? Improving your credit can lead to significant savings on your insurance premiums.