Auto Insurance And Credit: Friends Or Foes?

Many people wonder whether auto insurance can help improve their credit score. The short answer is no – simply paying for car insurance doesn't help build credit. However, if you pay your monthly car insurance premiums on time and with a credit card, it could improve your credit score.

In most states, auto insurance companies use your credit score to determine your rate. A low credit score could cost you hundreds in car insurance every year.

Paying auto insurance with a credit card

Using a credit card to pay for auto insurance can have its benefits, but it's important to weigh these against the potential drawbacks. Here are some things to consider:

Pros

• Convenience and rewards: Paying with a credit card can be more convenient than other methods, especially with automatic payments. It can also help you rack up reward points for travel, cashback, and other benefits.
• Security: Credit cards usually offer better fraud protection than other payment methods.
• Cash flow management: A credit card can help you manage your cash flow, especially if it offers a grace period for paying your balance in full.
• Improving credit score: If you pay your credit card bill on time and in full each month, paying your auto insurance with a credit card can indirectly help improve your credit score.

Cons

• High-interest rates: Failing to pay off your credit card balance in full each month can lead to high-interest rates on your auto insurance premiums, making it more expensive in the long run.
• Fees: Some insurance companies and credit card companies charge processing or convenience fees for credit card payments, increasing your overall costs.
• Credit score impact: Careless credit card usage can negatively impact your credit score. Missing payments or carrying a high balance can make it harder to qualify for credit in the future.
• Temptation to overspend: Using a credit card may make it easier to overspend or rely on credit for other expenses, leading to a cycle of debt.

In conclusion, paying auto insurance with a credit card can have advantages, but it requires financial discipline to avoid the potential pitfalls. It's important to evaluate your personal finance habits and decide if this payment method aligns with your financial goals and capabilities.

Improving your credit score

• Make on-time payments: Payment history is the most important factor in determining your credit score. Set up autopay for at least the minimum amount due and create calendar reminders to ensure you never miss a payment.
• Pay down revolving account balances: Aim to keep your credit utilisation rate, or the percentage of available credit you're using, as low as possible. If you have high credit card balances, make paying them off a priority.
• Don't close your oldest account: The length of your credit history makes up a significant portion of your credit score. Keeping your oldest account open can help maintain a positive credit history.
• Diversify your credit: Lenders consider your credit mix, which includes different types of credit such as credit cards, auto loans, and mortgages. Applying for a new type of credit can help improve your credit mix and increase your score.
• Limit new credit applications: Each time you apply for credit, a hard inquiry is made on your credit report, which can negatively impact your score. Only apply for new credit when necessary and consider the potential impact on your score.
• Dispute inaccurate information: Inaccurate information on your credit report can harm your score. Review your credit reports regularly and dispute any errors or fraudulent activity.
• Become an authorised user: If you're new to credit, consider asking a friend or family member to add you as an authorised user on their credit card account. This can help build your credit history, especially if the account has a positive payment history and a low credit utilisation rate.
• Use a secured credit card: A secured credit card is backed by a cash deposit and can help build or rebuild your credit. On-time payments and low credit utilisation can improve your score over time.
• Get credit for rent and utility payments: Services like Experian Boost and RentTrack can add your on-time rent and utility payments to your credit report, which can improve your score.

While improving your credit score takes time and consistency, following these tips can help you see positive changes and work towards a stronger financial future.

Credit-based insurance scores

While a good credit-based insurance score can lead to lower insurance rates, it is essential to note that insurers consider multiple factors when setting premiums. These factors may include claim history, location, the type of vehicle or home insured, discounts, coverage types and amounts, and the policy's deductible.

How auto insurance companies determine rates

Auto insurance companies use multiple factors to determine rates. While not all companies use the same parameters, here are some of the most common factors that influence the cost of auto insurance:

• Credit score: A high credit score can help lower insurance rates. Auto insurance companies in most states can consider an individual's credit score when calculating their car insurance premiums. A higher score typically translates to lower premiums. Credit-based insurance scores are derived from credit reports and include factors such as payment history, outstanding debt, and credit use. These scores help insurers predict the likelihood of a policyholder filing a claim and the potential cost.
• Driving record: The better one's driving record, the lower the insurance premium. Accidents, serious traffic violations, and a history of moving violations, such as speeding or reckless driving, can lead to higher insurance rates. Additionally, being at fault in an accident or having a DUI/DWI conviction can also increase insurance costs.
• Age and driving experience: Younger and less experienced drivers often pay higher insurance rates due to their higher risk of being involved in accidents. According to data, teens and young adults typically pay the highest rates for auto insurance. Premiums usually decrease once an individual turns 25 and continue to drop as they get older, with drivers over 55 generally paying lower rates. However, at age 75 or so, premiums tend to rise again.
• Gender: In states that allow insurance companies to consider gender, women often pay less for auto insurance than men. This is because women are statistically less likely to be involved in car accidents and tend to have less severe accidents when they do occur.
• Vehicle type: The cost of repairing and replacing a vehicle, its engine size, safety record, and the likelihood of theft all impact insurance rates. Vehicles with high-quality safety equipment may qualify for premium discounts. Additionally, insurers consider the potential damage a vehicle can inflict on another car in an accident, with models that have a higher chance of causing damage resulting in higher liability insurance rates.
• Location: Urban drivers often pay higher insurance rates due to higher rates of vandalism, theft, and accidents. The cost of medical care, car repair costs, and weather-related risks can also vary by location and impact insurance rates.
• Mileage and vehicle usage: The more miles driven, the higher the chance of accidents. Therefore, those who drive for work or commute long distances will pay more for insurance. On the other hand, occasional or pleasure drivers will pay less.
• Insurance history: A gap in insurance coverage, such as a period without insurance or a cancellation due to non-payment, can lead to higher insurance rates.
• Claims history: A history of filing multiple claims suggests a higher likelihood of future claims, resulting in increased insurance rates.
• Type and amount of insurance coverage: The limits, deductibles, and types of coverage (e.g., collision, comprehensive, uninsured motorist, medical expense coverage) all impact insurance rates. Generally, adding more coverage results in higher premiums.

The impact of credit score on auto insurance rates

In most US states, a person's credit score can impact their auto insurance rates. Credit-based insurance scores are used by auto insurance companies to assess the risk of a policyholder filing a claim and the potential cost. A low credit score can drive up insurance rates as it is associated with a higher likelihood of filing a claim. A high credit score, on the other hand, can help secure lower insurance premiums.

A low credit score can result in higher auto insurance rates, with drivers facing an average increase of 76% on their insurance premiums. In some states, the increase can be as high as 100%. This is because insurers perceive individuals with low credit scores as a greater financial risk and, therefore, charge higher premiums to compensate for the potential cost of claims.

A credit-based insurance score is a numerical rating derived from an individual's credit report. It includes factors such as payment history, outstanding debt, and credit use. Insurance companies use this score to determine insurance premiums, with lower scores often leading to higher rates.

Having a poor credit score can increase insurance rates more than having a speeding ticket or an accident, and possibly more than a DUI. A poor credit score can continually impact insurance rates, unlike traffic tickets, which typically drop off a driving record after three to five years.

How to improve credit-based insurance scores

Improving one's credit score can help secure lower insurance premiums. This can be achieved by paying bills on time, decreasing credit card debt, and maintaining old lines of credit. Additionally, diversifying credit by responsibly managing a mix of credit accounts, such as credit cards, loans, and mortgages, can also help improve insurance scores.

States that prohibit the use of credit scores in insurance rates

It is important to note that some states, including California, Hawaii, Massachusetts, and Michigan, prohibit or limit the use of credit scores in determining auto insurance rates. In these states, insurance companies are not allowed to factor in an individual's credit score when calculating insurance premiums.

Frequently asked questions