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Does Bad Credit Impact Insurance Rates?

06/10/2019 @ 4:55 am

You might be shocked to find out that your insurance provider checks your credit. This is especially true as you’re shopping for a new policy, but some will even pull your credit file periodically.

Plenty of Canadians hear credit can impact their insurance rates

If you have bad credit or are just afraid you do, this kind of thing can induce quite a bit of panic. It’s natural to wonder what will happen if your insurance company doesn’t like what it finds when it pulls your credit. For example, will a low credit score mean you have to start paying more? This is why it’s important to know if bad credit affects your insurance rates or not.

The Answer Is

Bad credit can result in high insurance rates for your home, car, etc. That might not be the answer you want to hear, but it’s the truth.

Notice how the answer includes “might.” This isn’t to say just because you have poor credit you can’t get good or at least reasonable insurance rates. After all, some people might have credit problems but they’re still a good insurance risk.

Some insurance providers don’t look at your credit when calculating rates. They look into other factors, like your history of insurance claims, then make a decision. But your insurance company might pull your credit score and file as well as look at those other factors, then base your rates on what they find. That’s troubling if you have bad credit.

Many Credit Scores

Most Canadians have no idea they have more than one credit score. Some might think they have two or three, but the fact is you have many credit scores. That is probably shocking, but consider for a moment that your credit is used for all kinds of things. Utility companies might pull it to see if you need to pay a deposit up front before getting service. Landlords will run your credit before renting from you, either rejecting your application or requiring a larger deposit.

You have a separate credit score and report that’s crafted just for insurance purposes. Exactly what’s on there is usually a mystery, unless a potential insurance provider shows it to you. What you get through the credit bureaus or different services online is what some call your glamour or educational credit score. It’s a generic score that more or less represents what your overall credit health is like. That means for insurance purposes, your score could be lower or higher.

These numbers are used to help screen you for all kinds of things. One is a score for insurance purposes. While some of the same information used to calculate your other scores might be factored in, so are things that more directly affect whether or not you’ll make an insurance claim.

Why Do Insurance Providers Do This?

Plenty of people, upon finding out that insurance companies will look at your credit file and score, wonder why it’s even a practice. After all, you’re not exactly applying for a loan or any kind of credit with your insurance company, so what does it matter?

Insurance groups claim that creditworthiness has been proven through studies to be linked to some key factors. The top one is how likely you are to file an insurance claim. Naturally, there’s some vigorous disagreement about whether or not that’s actually true, but it is what insurance providers have concluded.

Bad credit and high insurance risk often go together

A person who isn’t very responsible with their credit presumably isn’t as responsible in other areas of their life. That’s at least the line of thought. For example, someone who thoughtlessly spends money using a credit card and then struggles to pay off the balance might be more likely to leave the oven on and then go to work. They might also tend to text on their phone while driving, another dangerous practice which could lead to an insurance claim.

Even more sinister, some insurers say that people with credit problems are more likely to try committing insurance fraud. This is especially true if a person owes a significant amount of money to a creditor. The fear is that a person might do something like burn down their house or purposely crash a car just to collect the payout from the insurance company, then turn around and use that money to pay off debts. That might not sound like a good idea, but people in desperate situations can stop thinking rationally.

It Actually Depends

While it’s true that your bad credit might lead to higher insurance rates for your car, home, etc. that’s not always true. In Canada, it’s all about what province you live in. Regulators have been coming down hard on insurance companies for this practice that some people find to be unfair.

Changes have been coming rapidly and likely will continue for the foreseeable future. The best thing to do is check with the province where you live and see what the laws are currently. In some, insurers can pull your credit for the purpose of calculating rates for home insurance only, while doing it for car or other types of insurance policies is expressly banned.

It might even be that where you live has a requirement that the insurance company must get your permission before accessing your credit file. If all this seems confusing, that’s because the Canadian government hasn’t imposed a nationwide law, leaving it up to the local governments to sort out.

In some provinces, certain types of insurance is heavily regulated by the government, This actually makes credit checks for the purpose of setting rates irrelevant or unnecessary.

So why would anyone agree to reveal their credit score or credit history if they live in a province where they must give permission to the insurance provider? It comes down to money, because insurance companies will provide a discount based on that information. If you have bad credit you’re probably not going to move forward with that deal, but many other people would.


People also worry that when they shop for insurance their credit will be negatively impacted. They’ve probably heard that inquiries show up on your credit report and each one will decrease the score, which technically is true. However, there is more to this story.

Insurance providers obviously pull your credit, but they don’t do what’s called a hard pull. Your score can take a slight dip after a hard pull, like when you apply for a credit card or a car loan. Even a hard pull likely won’t suddenly send you into bad credit territory.

When an insurance company checks your credit for the purpose of approving you and setting your insurance rates, it does a soft inquiry. This means you can see that the insurance provider accessed your credit file, but potential lenders do not see it. Also, a soft inquiry has zero effect on your credit score since they’re not calculated in at all.

These soft inquiries are done for more than just insurance purposes. Every time you receive a credit offer in the mail, like a preapproval on a credit card or car loan, it’s because of a soft inquiry the company did to see if you might qualify. Employers might also do a soft inquiry to see if you’re deep in debt or are overall responsible financially.

So don’t panic because you see a soft inquiry on your credit file from an insurance provider. As long as you actually applied for an insurance policy through them, it does absolutely no harm.

What Credit Factors Affect Your Insurance?

Not necessarily everything in your credit file will affect your insurance rates. Keep in mind this isn’t like you’re getting approved for a car loan or mortgage, so bad credit in those situations doesn’t necessarily mean bad credit in this scenario.

Negative items that could cause your rates to increase might be:

– Late payments on credit accounts

– Excessive debt levels

– Collection actions against you

– Too many hard credit inquiries

– Not enough credit history

Exactly how much these different items affect your insurance rates really depends on the insurance provider and the rest of the information on your credit report and in your insurance history.

There are some factors which can help improve your insurance rates, like:

– Any accounts which are open and in good payment status

– Long-standing credit accounts

Obviously, you want to stay on top of your financial commitments so you don’t have too many problems both with getting credit in the future and getting the best rates possible on insurance.

What Does Credit Have To Do With Insurance?

Even after reading all this, you might still be wondering what your credit score and report really have to do with your insurance. It’s a fair question plenty of people ask since they seem to be unrelated, but many insurance providers have good reasons to believe there’s a connection.

Numerous academic studies have concluded that poor credit and the risk of accidents go together in most people’s lives. For example, The University of Texas looked closely at over 170,000 insurance policies as well as the credit files for those insured. Through statistical analysis, researchers were able to conclude those with poor credit scores had more car insurance claims than those with good or excellent credit. In addition, people with lower credit scores had higher claim amounts than the other policyholders, making them all around a greater risk and higher liability for insurance providers.

When it comes to other property insurance, such as for your home, debt management is still important. Other studies have found that your credit score and history is a solid predictor of how you’ll maintain your home and possessions. People who are careless or disorganized enough to not pay their debts on time are also more likely to have conditions for a serious fire, flood, or other risks. They often neglect to care for their home as they should, making those risks increase.

While those who have bad credit might feel this is unfair, the best solution is to keep your insurance claims low and work on improving your credit. After all, you’ll reap many benefits from that strategy, including saving money through lower interest on your loans and enjoying the increased confidence good credit provides.

What You Can Do About Your Credit

Instead of just feeling like a victim if you have bad credit, you can do something about the situation. It takes time and discipline, but you are able to move that credit score up into a good range. This will help with your insurance rates as well as interest on loans and many other areas of your life.

You have the power to impact your credit score

First off, you should request a free copy of your credit report from TransUnion and Equifax. Look over each item on both reports, no matter how stressful that might be. If you see anything that doesn’t look familiar or accurate, inquire from the corresponding bureau how you can dispute the information. If the creditor who submitted it can’t confirm that what they put down is accurate, the entry has to come off your report. That alone can start improving your credit score.

You can also pay off old debts to clear up collection actions. Always get in writing from the creditors that they will remove the information from both credit reports.

Properly budgeting so you pay your current debts on time is also key. This will avoid late payments showing up on your credit file, which will hurt your score.


Insurance companies can pull your credit report and score, depending on where you live in Canada, and use that information to set your insurance rates. Studies have shown those with poor credit are usually at a much higher risk to make costly insurance claims, which is why this practice exists.