Your credit score influences more than just your ability to get a loan or a credit card. One area people don’t often think about? Insurance rates. Whether it’s auto, home, or even renters insurance, your credit can play a big role in how much you pay. If this comes as a surprise, you’re not alone. Many don’t realize how connected their credit score is to their insurance premiums, but understanding this link is key to saving money and staying informed.

How Do Credit Scores and Insurance Rates Connect?

Insurance companies use a tool called a “credit-based insurance score” to help determine how risky you might be as a policyholder. But don’t confuse this with your regular credit score that lenders use to approve loans or lines of credit. While the two scores are related, they are calculated slightly differently.

Here’s the idea behind it: Insurers believe there’s a connection between credit behavior and the likelihood of filing an insurance claim. Essentially, they’ve found that people with lower credit scores are statistically more likely to file claims, and those with higher scores are less risky to insure. This data-driven approach helps insurance companies decide who gets lower rates and who might pay more.

Say you’re applying for auto insurance. If you have excellent credit, you’ll likely qualify for lower premiums as the insurer sees you as financially responsible and less risky. On the flip side, if your credit score is poor, they’ll see a higher likelihood of claims, which means higher premiums for you.

Why Do Insurers Use Credit Scores?

At first glance, it might seem unfair for your credit score to influence what you pay for insurance. Why should your financial habits determine how much you pay to protect your car or home? The answer lies in how insurance companies assess risk.

For insurers, risk boils down to numbers. Credit-based insurance scores give them another tool to predict the likelihood a person will file a claim. They’ve conducted studies over decades that demonstrate the correlation between low credit scores and higher claims activity.

This method allows insurers to price their policies more accurately. It’s not perfect, and it’s not the only factor they use—but it’s an important one. They also consider things like your driving record, the value of your home, and where you live. Think of your credit score as one piece in a larger puzzle that helps shape your insurance rate.

Not All States Allow It

It’s worth noting that not all states allow the use of credit scores in determining insurance rates. California, Hawaii, and Massachusetts, for example, have laws prohibiting insurers from using credit scores in this way. But in most other states, credit scores play a significant role, so it’s important to understand where you stand.

How Your Credit-Based Insurance Score Impacts Your Premiums

To understand how this works in practice, imagine two individuals applying for the same insurance policy.

  • Person A has an excellent credit score, a clean driving history, and no past missed payments. Due to their high reliability, the insurer assumes they’re less likely to file claims and offers them a lower premium.
  • Person B has a poor credit score, overdue credit card payments, and a previous insurance claim. The insurer sees them as riskier to insure, so their premium is significantly higher.

Even if both individuals have the same make and model car or property value, their credit scores can still lead to drastically different costs for coverage.

It’s not just about auto insurance either. The same logic applies to other types of insurance, including homeowners insurance. For instance, if you’re insuring your property, a solid credit-based insurance score can make a big difference in how affordable your policy is.

Tips to Improve Your Credit Score and Lower Your Insurance Rates

The good news? You have control over your credit score. And by improving it, you may eventually see some savings on your insurance premiums. Here are practical steps you can take to boost those numbers and potentially lower your rates:

1. Check Your Credit Report Regularly

Start by getting a copy of your credit report from a reputable source. U.S. residents are entitled to one free report per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Look for mistakes, such as incorrect payment history or accounts that don’t belong to you, and dispute them immediately.

2. Pay Your Bills on Time

Payment history is a huge factor in both your standard credit score and your credit-based insurance score. Even one missed payment can hurt you, so set reminders, use auto-pay, or utilize budgeting apps to keep everything on track.

3. Keep Your Credit Utilization Low

Credit utilization measures the percentage of your credit that you’re using. For example, if you have a $10,000 credit limit and your balance is $3,000, your utilization rate is 30%. Aim to keep this rate below 30% to maintain a healthy score. If possible, shoot for 10% or lower.

4. Avoid Opening Too Many Accounts at Once

Every time you apply for new credit, it’s marked as a “hard inquiry” on your report. Too many hard inquiries can temporarily lower your score, so only apply for credit when you really need it.

5. Build Credit History Thoughtfully

If you’re new to credit or working to rebuild, focus on responsible use of any accounts you have. A secured credit card or a small loan you repay in full each month can help build positive history over time.

6. Pay Off Debt Strategically

If you have outstanding credit card debt, try to pay it down as quickly as possible. Focus on high-interest accounts first while making minimum payments on others to prevent late fees.

While it might feel frustrating that your premiums can hinge on what’s in your credit report, understanding how it works gives you the power to make changes and save money over time.