Haris Ashley
In the UK, a person's credit score can affect their insurance. While insurers do not have a standard method for calculating premiums, a poor credit rating generally leads to higher insurance costs. Insurers may perform a soft credit check to verify a customer's details, or a hard credit check if the customer chooses to pay monthly instalments. A soft check does not affect a person's credit score, but a hard check is visible to other lenders and can impact the customer's credit file. A person's credit score can influence their insurance costs because it demonstrates their ability to repay credit and indicates whether they can be trusted to repay debts.
| Characteristics | Values |
|---|---|
| Insurers check credit scores | Yes, insurers check the credit rating of any person or business requesting an insurance policy through them. |
| Credit score impact on insurance premium | Yes, a poor credit score can increase the insurance premium. |
| Credit score impact on insurance acceptance | Yes, insurers may decline to offer insurance to people with bad credit. |
| Credit score impact on payment mode | Yes, a poor credit score may require upfront payment instead of a payment plan. |
| Credit score improvement | Paying bills on time, registering to vote in the UK, and regular credit score checks can help improve the credit score. |
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What You'll Learn
Paying annually vs. monthly
In the UK, insurance providers will carry out a "'soft' credit check" when providing a quote for car insurance. However, if you decide to pay monthly, they will do a "hard" credit check, which will be visible to other lenders. This can affect your credit score, as insurers will regard those with poor credit history as prone to more risky behaviour.
When it comes to paying for car insurance, you usually have the choice of paying for a year's worth of cover in one lump sum upfront, or paying a deposit and then spreading the rest via monthly payments, which is typically more expensive. This is because paying monthly is like getting a loan from your insurance company, with interest and service charges added to the cost of your policy.
For example, if the annual cost of a car insurance policy is £1,200, an insurance company may apply an interest rate, raising the total cost to around £1,450 for the year. This means that paying monthly will cost you £250 more over 12 months than paying annually.
However, monthly insurance payments can offer more flexibility, helping you to manage your budget throughout the year. It can be a good option if you can't afford a larger payment upfront.
Therefore, the choice between paying annually or monthly depends on your financial circumstances. If you can afford to pay annually, you will usually save money. However, if you need more flexibility, paying monthly can be a better option, despite being more expensive overall.
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Soft vs. hard credit checks
In the UK, credit scores can affect car insurance, with those with a poor credit history often paying more for their insurance than those with a better rating. When you get a quote for car insurance, an insurer will usually do a "soft" credit check to ensure the details you've provided are true.
A soft credit check is a type of credit search that gives a limited view of your credit report. It does not affect your credit score or appear to other lenders. It is commonly used for eligibility checks, insurance quotes, or checking your own credit. Soft searches are carried out by lenders, brokers, and comparison sites to help check your eligibility before you apply for a credit card or loan. Soft credit checks are also used by companies doing pre-checks, such as employers, landlords, banks, or retailers.
A hard credit check, on the other hand, is a full review of your credit file, including late or missed payments. It will impact your credit score and is visible to other lenders. A hard credit check is usually performed when you apply for credit products like loans, credit cards, mortgages, overdrafts, or mobile phone contracts. Multiple hard checks in a short time can suggest financial risk and negatively impact your credit score.
When you pay monthly for car insurance, you are effectively getting credit from the insurer, and they will do a hard credit check to assess whether you can make the payments. This type of check will be visible to other lenders and may be used to set the APR for your payments.
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Credit scores as a character reference
In the UK, it is not common practice for insurers to factor credit history into their assessment of a person's likelihood of making a claim. However, some reports suggest that those with poor credit history are statistically more likely to claim, and insurers may regard them as prone to riskier behaviour.
Credit scores are used by insurers as a character reference when deciding whether to quote and what premiums to charge. Credit scores demonstrate a person's ability to repay extended credit and show whether they can be trusted to repay debts. Insurers may decide not to quote a person with bad credit, or they may increase premiums or require upfront payment.
While credit scores are not the only factor in determining insurance premiums, they can play a significant role in the overall calculation. A person with a poor credit history may be seen as a riskier prospect, and as a result, they may face higher premiums or even be declined outright for certain types of insurance.
When purchasing car insurance, for example, most providers will check an individual's credit report and score. If an individual opts for monthly payments, insurers will typically perform a "'hard' credit check" to assess their ability to make the payments. This type of check will be visible to other lenders and can impact an individual's credit score.
It is worth noting that paying insurance premiums annually can help avoid the potential negative impact of hard credit checks. By paying in one lump sum, individuals can often bypass the credit check process and secure their desired coverage without any risk to their credit file.
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Credit scores and insurance quotes
In the UK, insurers will often check your credit score before offering a quote. While it is not considered common practice for insurers to factor your credit history into your likelihood of making a claim, some reports suggest that those with a poor credit history are statistically more likely to claim. Insurers may regard people with missed loan payments as being prone to more risky behaviour.
A study by the credit score specialist ClearScore analysed over 9,000 quotes and credit scores and found a link between elements contributing to credit scores and the premium customers were offered. Users with a higher credit score typically received lower premiums.
When you get a quote for car insurance, you will usually be offered the choice of paying for a year's worth of cover in one lump sum upfront or paying a deposit and then paying the rest in monthly instalments. At the quoting stage, an insurer will usually do a "soft" credit check to ensure the details you have given are true. However, if you decide to pay monthly, the insurer is giving you credit, so they will do a "hard" credit check to assess whether you can make the payments. This type of check will be visible to other lenders if they look at your credit history, and it will be factored into your credit score.
The Association of British Insurers (ABI) has said: "Most insurers will perform a credit check on you if you choose to pay monthly. Depending on the insurance provider, the information they receive might be used to set the APR for your payments, in addition to other factors." The APR is the interest rate and any extra charges you pay for spreading out the payments. It generally reflects the risk that a borrower presents – the higher the risk, the higher the rate.
If you have a poor credit history with several late or missed payments, an insurance provider may decide to charge you more interest to offset the risk that you will do the same with them. This can make your monthly payments more expensive. Some insurance providers also consider people with bad credit as more likely to make car insurance claims, which can drive premiums up.
While it may be trickier and more expensive to get car insurance with bad credit, it is not impossible. It is worth comparing quotes from different providers, as they will have different tolerances for poor credit scores.
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Improving your credit score
Register to vote
Registering on the electoral roll at your current address can help improve your credit score. Lenders use the Electoral Roll to verify your identity, which helps them avoid the risk of fraud and identity theft.
Pay your bills on time and in full
Making regular payments on time is a good way to show lenders that you are a reliable borrower and capable of handling credit. This includes paying your accounts, bills, and any loan payments on time and in full each month.
Keep your credit utilisation low
Your credit utilisation is the percentage of your credit limit that you use. A lower percentage is usually seen positively by lenders and will increase your credit score. Try to keep your credit utilisation below 30% if possible.
Get a credit-builder card
Credit-builder cards typically have low spending limits and high-interest rates. When used well, they can help you build your credit score over time. Use them for small amounts of spending each month, and make sure you repay the card on time and in full each month to avoid paying interest.
Check for errors on your credit report
Even small mistakes, such as a mistyped address, can affect your score. It's important to check your credit report regularly to ensure all the information is accurate and up-to-date. If you spot any mistakes, contact the provider directly and ask them to change it.
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Frequently asked questions
Yes, credit score can affect insurance in the UK. Insurers use credit scores as a character reference when deciding whether to quote and what premiums to charge. A higher credit score will generally lead to lower premiums.
Credit scores demonstrate a person's ability to repay extended credit and show whether a person can be trusted to repay their debts. Insurers may decide not to quote a person with bad credit, increase their premiums, or require payment upfront.
Paying bills on time and in full each month is the most significant thing you can do to improve your credit score. Registering to vote in the UK can also slightly boost your credit score.
