Do car insurance payments help credit?

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Here's what you need to know...
  • In many states, your credit score can help companies determine how much you’ll pay for coverage
  • Carriers that use credit score to determine rates have found that there is a direct correlation between credit worthiness and insurance claims
  • Insurers don’t use your actual credit score when underwriting your application. Instead, the company will request a credit-based insurance score that only takes some of the information from your credit report
  • While making your credit payments on time can help lower your insurance premiums, paying your insurance premiums on time will not affect your credit
  • If you don’t pay your insurance premiums, you can affect your insurance history, which can lead to high-risk auto insurance rates

When you finance a car, your credit score will have an effect on how much car insurance you can afford. If you have a poor credit history, the lender may limit your purchase options and increase your interest rates.

A poor credit history can also affect how much you’ll pay for insurance on the vehicle that you end up choosing.

Your credit score can be used to determine your rates, but that doesn’t automatically mean that making your insurance payments can help you build your credit.

While there is a correlation between credit ratings and auto insurance claims, paying your premiums on time won’t help you improve your score over time. Here’s what you need to know about credit and auto insurance.

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Not All Insurance Companies Can Use Your Credit to Underwrite Your Application

Many states have laws in place that grant companies the right to use credit reports when making underwriting decisions.

In states where carriers are permitted to base rates on the information that’s found in the policyholder’s credit report, your insurance rates can go up when you have no credit or defaults in your established credit file.

While a majority of states have found that there is a correlation between credit rating and insurance risk, there are still a few states that prohibit the use of credit in determining rates or eligibility.

Currently, consumers in California, Hawaii, Massachusetts, and Maryland don’t have to worry about their companies reviewing their credit information. In these states, officials believe using credit is a discriminatory practice.

Why do most states allow carriers to use credit?

Insurance carriers calculate your personal rates by predicting how likely you are to have a loss. There’s a long list of different risk factors that underwriters use to set your rate.

Each of the risk factors can either make you more likely or less likely to file an insurance claim.

Even though credit has nothing to do with your ability to drive, research shows that there is a predictive correlation between certain data on your report and your likelihood of filing a claim.

The study shows that people with good scores are more likely to pay for their own claims rather than filing a claim for payment through their insurers.

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Your Credit-based Insurance Score Isn’t Your FICO Score

When credit bureaus are calculating your FICO score, the agency will use more than 130 different elements to arrive at a final number.

Not all of these elements can be used by when determining your credit score. That’s why a separate score, called a credit-based insurance score, is used to underwrite auto insurance applications.

Your credit-based insurance score is created by using proprietary information from your credit report that has been found to be non-discriminatory.

Before the carrier uses your score, they must notify you in writing. While you must agree that the carrier can use your insurance score, you won’t qualify for coverage if you say no.

Here are elements from your report that can’t be used:

  • Race
  • Gender
  • Marital status
  • Income and occupation
  • Age
  • Child support obligations
  • Interest rates you’re paying
  • Inquiries for employment

Are your insurance payments reported to your credit file?

Unfortunately, for policyholders who make their premium payments on time, the payments that you make to keep your coverage active aren’t reported to credit bureaus — no matter if you pay on time or if you’re late.

If you’re relying on your insurance to help you build your credit, look for other options. You should consider paying premiums with a credit card and then paying your credit card balance down.

Your Payment History Can Benefit You

There are benefits for having a good payment history with your insurer. If you keep your coverage active, you will qualify for a prior insurance discount and a loyalty discount.

If you let your coverage lapse, you may be stuck paying high-risk rates until you can show that you can make consistent payments on time.

While paying your insurance doesn’t help you build your credit, paying other accounts promptly is important to keep your insurance rates low.

Make sure that you keep your coverage active to avoid fines. If you’re not happy with your rates, use our FREE online rate comparison tool and find a better deal. Enter your zip code below to get started!

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