The Truth About Credit and Insurance Rates

Money Girl explains the relationship between your credit and what you pay for insurance. Find out which states allow credit to be used in setting rates, which types of policies are affected, and exactly how much having fair or poor credit can cost.

Laura Adams, MBA
7-minute read
Episode #415

How Often Do Insurers Check Your Credit-Based Insurance Score?

Different carriers check your credit-based insurance score at different times, but it’s typically used when you apply for a new policy—not every time your existing policy is up for renewal.

In other words, changes to your credit probably won’t affect your premiums once you’re already signed up for a policy. That can be helpful if your credit gets worse, but also means you could be overpaying if your credit has improved over time.

The best advice I can give is to shop your auto and home insurance policies every year so you can find out if you qualify for a lower rate. There’s no negative side effect for shopping. And if you don’t find a lower rate, you can stay with your current company.

See also: What You Should Know About Credit-Based Insurance Scores

How Much Credit Affects What You Pay for Insurance

As I previously mentioned, insurance is regulated by states, so the rating rules vary depending on where you live. While no state allows credit to be the only factor in setting rates, a few states have banned its use completely:

  • Auto insurance policies for residents of California, Hawaii, and Massachusetts can’t be rated using credit history.
  • Home insurance policies for residents of California, Maryland, and Massachusetts can’t be rated using credit history.

You might be surprised by how much your credit can affect what you have to pay for insurance.

A 2015 insuranceQuotes study found that across the nation, consumers with poor credit pay an average of 100% more for home insurance than those with excellent credit. Even having fair credit costs you 32% more on average than if you had excellent credit!

The study breaks down the data by state and shows that homeowners in Montana pay the most when they have fair credit, 66% more than residents with excellent credit. The next most expensive are Washington D.C. (61%), Texas (55%), Colorado (54%), and Arizona (54%).

Another insuranceQuotes study about the impact of credit on auto insurance also showed huge increases, but they’re not quite as high as the impact of credit on home insurance.

The average increase for having poor credit was 91% and fair credit was 24%, when compared to having auto insurance with excellent credit. The most expensive states for having auto insurance and fair credit are Missouri (28%), Mississippi (28%), Louisiana (28%), Alabama (27%), and Illinois (27%).

Let's get back to Melanie's question. The answer is yes, auto insurance companies use your credit when setting rates. But how much it affects your rate, or whether it can be considered at all, depends on the state where you live.

When you build and maintain a good credit history, you'll see the benefits in many areas of your financial life, including paying less for auto and home insurance premiums.

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Debt! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

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Man Showing Insurance Policy image courtesy of Shutterstock


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.