How your credit score affects home and car insurance rates

When it comes to insurance premiums, homeowners and drivers with bad credit tend to pay more for coverage than those with good credit. Insurers use this metric because people with good credit scores are viewed as more financially responsible due to a statistically lower filing of claims. 

Of course, your credit is just one of the factors considered by insurance companies. But where your credit score stands can impact your insurance costs. 

We explore how credit impacts your home and car insurance rates.

What are credit-based insurance scores?

“A consumer’s credit history is one of the most, if not the most, accurate predictors of risk available to insurers,” said P.J. Smith, senior director of credit-based insurance products at LexisNexis Risk Solutions.

This means that when determining premiums, insurers rely heavily on the insights provided by credit histories. Credit-based insurance scores help insurers assess the likelihood of a policyholder filing a claim, allowing them to adjust their offerings accordingly.

“A person’s credit history is used in credit-based insurance scores to provide an objective and consistent tool that insurers use, along with other applicant information, to better predict a consumer’s risk and the likelihood of experiencing a future loss,” Smith said.

Smith said credit-based insurance scores gauge a customer’s risk. However, how the insurer weighs that information varies.

“Each insurance company makes underwriting decisions based on its own business requirements. Depending on a company’s own proprietary strategies, they are likely to evaluate credit-based insurance scores alongside many other variables to ascertain if a consumer has a higher risk of experiencing a loss,” Smith said.

What is the difference between a credit score and an insurance score?

Your credit history influences both your insurance risk scores and credit risk scores. However, consumers shouldn’t confuse the two.

“The biggest difference is that insurance risk scores look for stability, but credit risk scores look for a reliable pattern. Insurance scores are also more interested in how regularly you pay than in how much you already owe,” said Craig Watts, former public affairs director for Fair Isaac Corp. (FICO). 

Roughly 300 insurers use FICO’s insurance risk scores to calculate insurance quotes. But insurance companies are adapting. For example, State Farm and Allstate Insurance have noted the correlation between credit scores and claims and have tailored their own insurance risk-scoring systems as part of their pricing.

How credit scores affect your insurance costs

While Fair Isaac Corp. will not release the details of its insurance risk-scoring model to the public, your credit score can give you an idea of your insurance risk score.

The five categories of your credit score are:

1. Past payment history: Evaluates how consistently you’ve paid your credit bills, including whether payments were made on time, any accounts in collections, the presence of “adverse public records” (such as bankruptcies, wage garnishments, or liens), and the number and duration of delinquencies or collection items.
2. Amount of credit owed: Considers the number of accounts with balances, the types of accounts you hold, and how close your balances are to their credit limits.
3. Length of credit history: Examines how long you’ve had credit accounts overall and the duration of specific accounts.
4. New credit: Looks at the number and proportion of recently opened accounts, the frequency of credit inquiries, and efforts to rebuild positive credit history following past payment issues.
5. Types of credit in use: Reviews the variety and activity of your credit accounts, such as credit cards, retail accounts, installment loans, and mortgages.

Why does bad credit affect home and auto rates?

When you have a bad credit history, that’s a red flag to insurance companies. Generally, a bad credit score makes you more likely to file a claim, which leads to expenses for the insurance company. 

Since insurers consider people with bad credit to be a higher risk, they usually raise premiums to compensate for that level of risk. 

How much does bad credit affect home and auto rates?

Although the details of your situation impact how much bad credit impacts your insurance rates, you can expect to see higher rates if you have bad credit. 

On average, drivers with poor credit pay 80%, or $1,462, more for a full coverage policy than drivers with good credit. And drivers with fair credit pay around $360 more per year than drivers with good credit. 

How does your credit score affect car insurance?

Credit is a determining factor, but many other factors go into an auto insurance rate, including:

• Location
• Age and experience of drivers
• Make, model and age of vehicle
• Miles driven annually
• Your insurer
• Driving history

If you’re in a state that allows credit-based auto insurance scores to influence rates, you’ll pay more for car insurance if you have poor credit.

“Credit will increase the cost of auto insurance if you have not maintained good credit history,” said John Espenschied, agency owner, Insurance Brokers Group. “You can have a clean driving history with no driving violations or accidents, but still be penalized for poor credit, which means higher insurance premiums. Credit is an accurate means for insurance companies to be able to predict adverse selection and adjust the premium based on potential claim risk. The same would apply when obtaining a credit card or home loan — your credit will determine what you will pay.”

How much can you save by having a better credit score?

• 71% — A person with good credit pays 71% less for car insurance than someone with poor credit.
• 18% — A person with fair credit pays 18% less for car insurance than someone with poor credit.

“You can ask your insurance company if a credit-based insurance score was used to underwrite and rate your policy and which risk category you were placed in after you receive a quote,” said Loretta Worters, vice president of media relations for the Insurance Information Institute. 

Rate increases vary by insurer and state. Michigan is the worst for drivers with poor credit. Drivers in that state pay a significantly higher rate than the state’s average. Drivers with poor credit in many states pay double what is charged to people with good credit.

State average auto insurance premiums by credit score

Here are the differences by state for car insurance:

How does your credit score affect home insurance?

Credit history is one of many factors used by carriers to calculate the potential risks and price of a home insurance policy.

Other factors that play a part in home insurance costs are:

• The type of home
• Location
• Claims history
• The closeness of a fire hydrant
• Fire suppression and alert systems

Of course, home insurance claims can increase your rate.

However, the only other thing that can increase your premium more is bad credit:

• Homeowners with poor credit pay an average of 127% more for home insurance than someone with excellent credit. That’s roughly $1,700 more annually.
• People with fair credit pay 34% more than those with excellent credit. That’s an average of $425.

State average home insurance premium by credit score

Here are the differences by state for home insurance:

Note: Some states aren’t included because they don’t allow insurers to consider credit history for home insurance rates. 

Why does credit score affect insurance costs?

A 2013 study published by the Bureau of Business Research at the University of Texas showed a strong correlation between credit history and filing auto insurance claims. The study matched credit scores with claim data and found that people with bad credit scores claimed losses of 53% more than the average.

“People who manage their finances well tend to also manage other important aspects of their lives responsibly, such as driving a car,” said Loretta Worters from the III. “People who manage money carefully may be more likely to have their car serviced at appropriate times and may also more effectively manage the most important financial asset most Americans own — their house — making routine repairs before they become major insurance losses.”

Statistics show a correlation, but critics don’t believe a person’s credit should lead to a denial or higher rates. 

Birny Birnbaum, executive director of the Center for Economic Justice, testified before Congress on insurance credit scoring and outlined why it should be prohibited.

Birnbaum argues that credit-based insurance scores are arbitrary and unrelated to how well consumers manage their finances. Birnbaum said that scores penalize consumers due to lenders’ business decisions. Birnbaum added that 87% of family bankruptcies result from job loss, major medical bills and divorce.

“It is only in the cloistered world of insurance actuaries and executives that charging higher auto and homeowners insurance rates to someone who has suffered an economic or medical catastrophe is considered fair,” Birnbaum told Insure.com.

Which states don’t allow insurers to take credit scores into account?

Most states allow credit scores to factor into insurance rates, but there are a few exceptions:

• California: Insurers can’t use credit-based scores or your credit history to rate auto policies or set rates for homeowners insurance. 
• Hawaii: Hawaii doesn’t allow credit history to be used for auto insurance, but insurers can consider it for home insurance rates. 
• Maryland: Maryland does not allow insurers to consider credit history when determining home insurance rates, but auto insurers can consider credit metrics. 
• Massachusetts: Insurers can’t use credit-based scores or your credit history to rate auto policies or set rates for homeowners insurance. 
• Michigan: Insurers can’t use credit-based scores or your credit history to decide whether to deny or cancel a home or auto insurance policy. 
• Oregon: The information insurers can use from your credit report is limited. 
• Florida: Florida lets insurers only partially base rates on credit history. So, people with poor credit only pay an average of 3.6% more than those with excellent credit.

“Keep in mind, each insurer has to file its rates and have them approved by each state (Department of Insurance), who ensure they meet all actuarial and regulatory requirements working on behalf of consumers in these states,” said Smith.

How often do insurance companies check credit history?

When insurance companies check your credit history varies. Most companies pull checks when quoting a new applicant and when a customer renews. Most carriers run another check if there are regulatory requirements. These requirements vary by state. Some companies implement a process to re-run your credit-based insurance score every few years.

It is important to note that insurance credit inquiries are soft inquiries that do not negatively affect your credit score like hard inquiries can.

“Credit history data is dynamic and can change over time,” said Smith. “Because of this, carriers will refresh the credit-based insurance score of a policyholder. A common practice is every two to three years at renewal. Also, some states have requirements for ‘at the insured’s request’ where a policyholder can ask to have their score re-run.”

How to improve your credit-based insurance score

Insurers place importance on the factors that show long-term stability. 

By demonstrating responsible use of credit and keeping your balances low, you should see your insurance score improve. That could translate into lower insurance premiums if you’ve been impacted by a negative credit history in the past. 

Most importantly, make the effort to pay your bills on time. When you make your credit payments on time, you show a level of responsibility to insurance companies. 

How to lower insurance costs if you have poor credit

Since risk underwriting is the core point of differentiation between insurance companies, it’s important that those with a low credit score shop around and compare rates.

“Some will weigh credit information heavily while others may ignore it altogether,” said Kevin Haney, who owns A.S.K. Benefit Solutions and has more than a decade of experience with Experian. “Some companies even advertise that they do not check credit. Again, [people with] poor credit should shop around and get multiple quotes to find the best rates.”

Don’t fret if you have a poor credit history. It will take some time and diligence, but you can improve your credit score. Here are some insider tips to improve your credit score:

1. Always pay your bills on time.
2. Keep your oldest credit card or cards, but do not use them unless you can pay them off monthly.
3. Avoid opening numerous new credit accounts in a short period of time.

Credit history plays a vital part in your auto and home insurance rates. By improving your credit, you can save hundreds on insurance each year. In the meantime, here are some tips on how to shop for high-risk car insurance.