The hydro-swelling of smectite clay minerals in low-permeability reservoirs further decreases the reservoir permeability and results in low oil recovery. Currently, the traditional chemical anti-swelling agents are widely used, but most of them are only effective in the short term and are not environmentally friendly. Here, we report the use of Fe(III) reducing microorganisms (FeRM) as a novel green anti-swelling agent to enhance oil recovery from low-permeability reservoirs. The results showed that FeRM (Proteus hauserifective) inhibited/reduced the hydro-swelling of smectite clay minerals through a three-step biochemical mineralization reaction process. The structural Fe(III) reduction in minerals by FeRM can be an important driving force for illitization. The maximum inhibition efficiency (36.6%) and shrinkage efficiency (69.3%) were achieved at 35 °C and 0.1 Mpa. Furthermore, core displacement tests showed that FeRM reduced the waterflooding injection pressure by 61.1%, increased the core permeability by 49.6%, and increased the oil recovery by 8.1%. Finally, the mechanism of FeRM-enhanced oil recovery was revealed. This study demonstrates that using FeRM to inhibit/reduce the hydro-swelling of clay minerals holds great potential to enhance the oil recovery from low-permeability reservoirs.