Auto Insurance Policy: What Earns You Credit?

Credit scores are a major factor in determining auto insurance rates. A low credit-based insurance score can lead to higher car insurance rates than a DUI in certain cases. Insurance companies use credit scores to assess the likelihood of filing a claim and the associated risks. While getting a quote does not impact credit scores, maintaining good credit history and promptly paying off credit card balances can positively influence insurance rates. Additionally, paying auto insurance with a credit card can offer rewards but may entail additional fees and interest charges.

Credit scores are used to determine how likely you are to file a claim

Credit scores are used by auto insurance companies to determine how likely you are to file a claim. A credit-based insurance score is used to assess how much of a risk you are to cover and helps them decide on the cost of your coverage. These credit-based insurance scoring models, created by data analytics companies like LexisNexis and FICO, have been shown to be accurate. A 2007 study by the Federal Trade Commission found that credit scores are a good indicator of whether someone will file an insurance claim.

A credit-based insurance score is not the same as a regular credit score. While the factors used to determine your score are the same, they are weighted differently. A credit score predicts the likelihood that you will repay a loan, whereas a credit-based insurance score looks at the likelihood of you filing an insurance claim.

The factors used to create a credit-based insurance score are:

• Payment history
• Outstanding debt
• Credit history length
• Pursuit of new credit
• Credit mix

The more detailed breakdown of these factors, according to the Department of Insurance, Securities and Banking, is as follows:

• Payment history (40%): How you made payments on your debt, including frequency and the amount paid off.
• Outstanding debt (30%): The amount of debt you have.
• Credit history length (15%): The amount of time you have had a line of credit.
• Pursuit of new credit (10%): Whether you have recently applied for new lines of credit.
• Credit mix (5%): The types of credit you have, including credit cards, mortgages, or auto loans.

Credit scores are used by insurance companies to assess your financial risk. A higher credit score indicates that you are less likely to file a claim and are, therefore, considered a lower risk. This means you are more likely to get a better rate on your insurance premium. Conversely, a lower credit score may result in higher insurance rates as you are deemed a higher risk.

It is important to note that insurance companies cannot use your credit history as the sole reason for increasing rates or denying or canceling a policy. Additionally, state laws differ in terms of using credit to set insurance rates, and some states, like California, Hawaii, and Massachusetts, do not allow credit history to be used when determining car insurance rates.

Credit insurance is optional and designed to make payments to your lender if you die, lose your job, or become disabled

Credit insurance is an optional form of insurance that can be purchased alongside an auto loan. It is designed to provide financial protection in the event of unforeseen circumstances that may impact your ability to make payments on your loan. This includes situations where you pass away, lose your job, or become disabled.

Credit insurance is not a requirement when taking out an auto loan, but it can be a valuable safety net for individuals concerned about their financial stability. Before deciding to purchase credit insurance, it is important to carefully consider your options and inquire about the associated costs. This type of insurance is not mandatory and can increase the overall cost of your loan, as it adds to the loan amount and subsequently increases the interest payable over the loan's lifespan.

There are four primary types of credit insurance:

• Credit life insurance: This type of insurance pays off all or a portion of your loan in the event of your death.
• Credit disability insurance: Also known as accident and health insurance, this insurance covers loan payments if you become ill or injured and are unable to work.
• Involuntary unemployment insurance: This insurance covers your loan payments if you lose your job through no fault of your own, such as in the case of a layoff.
• Credit property insurance: This insurance covers your vehicle if it is stolen or damaged in an accident or natural disaster. It typically pays the value of the vehicle or the remaining loan balance, whichever is lower. It is worth noting that this type of protection is often already included in standard auto insurance policies, so purchasing separate credit property insurance may not be necessary.

Understanding the terms of the credit insurance policy being offered is essential. You have the right to cancel credit insurance products at any time to reduce your costs, and you may be eligible for a refund if you sell, refinance, or prepay your auto loan.

You can use a credit card to pay for auto insurance

Credit cards are a widely accepted form of payment for auto insurance policies. Major companies like Progressive, Geico, and State Farm all allow payments by credit card. You can pay your auto insurance premium with a credit card online, through a mobile app, or over the phone.

Using a credit card to pay for auto insurance has several advantages. It is a fast, easy, and convenient way to pay. It helps keep all your payments in one place and makes tracking expenses easier. Credit card payments are also processed instantly, which means you have more time to make your insurance payments each month and can pay on the due date. Additionally, if you pay your credit card bill in full and on time, you can earn reward points, which can be redeemed for travel, cash, or other expenses.

However, there are also some disadvantages to consider. Using a credit card can lead to extra fees and charges, and if you're not disciplined with your spending, it can be easy to fall into debt. Credit cards have a credit utilisation ratio, which is the ratio of your total credit limit to the amount you've spent. If you spend close to your credit limit or regularly max out your card, it can negatively affect your credit score. Additionally, if you don't pay off your credit card bill in full each month, you'll be charged interest, which can add up over time.

Ultimately, whether or not you use a credit card to pay for your auto insurance depends on your financial situation and discipline with credit card spending. If you can take advantage of the rewards without falling into the potential pitfalls, using a credit card can be a great option for paying your auto insurance.

Poor credit increases full coverage rates by 86% compared to good credit

Poor credit can have a significant impact on the cost of auto insurance, and drivers with poor credit may face substantially higher rates compared to those with good credit. In fact, according to ValuePenguin, poor credit increases full coverage rates by 86% compared to good credit. This means that drivers with poor credit could be paying nearly double the rates of those with good credit.

The reason credit score affects insurance rates is that insurance companies use what is called a credit-based insurance score to assess the risk of a driver filing a claim. A lower credit score indicates a higher risk, and insurers compensate by charging more for coverage. This is based on the assumption that drivers with poor credit are more likely to file claims.

The impact of credit score on insurance rates varies across states, as some states prohibit or limit the use of credit scores in determining insurance rates. For example, California, Hawaii, Massachusetts, and Michigan have regulations in place to protect drivers from being overly penalized for poor credit.

It's important to note that improving your credit score can take time, but it's worth working on as it can lead to lower insurance rates. Paying bills on time, minimizing hard credit inquiries, and maintaining a low credit utilization ratio are some ways to improve your credit score.

You can get credit for on-time auto insurance payments on your Experian credit report by adding your insurance bills to Experian Boost

Experian Boost is a free feature that allows you to get credit for on-time auto insurance payments on your Experian credit report. By connecting your bank or credit card accounts to Experian Boost, you can add your insurance payments to your credit history and build a positive payment history. This can be especially beneficial for those with little to no credit history.

Here's how you can use Experian Boost to get credit for your on-time auto insurance payments:

Connect Your Bank Accounts

You can connect any bank accounts that you use to pay your auto insurance bills. Experian Boost uses multi-layered security technology, including bank-level SSL encryption, to ensure your data stays safe.

Select Your Bills

Once your account is connected, Experian Boost will scan your transactions for qualifying bills. It looks through up to two years of payment history, and qualifying bills will need to have at least three payments made in the past six months, including one payment within the last three months. Experian Boost will then prompt you to select which bills you want to add to your Experian Boost list.

See Your Results Instantly

If your on-time auto insurance payments qualify, you'll instantly see an improvement in your FICO® Score. Experian Boost users who see an improvement receive an average FICO® Score increase of 13 points.

By adding your on-time auto insurance payments to your Experian credit report through Experian Boost, you can build your credit history and demonstrate to lenders that you're reliable. This could lead to more card and loan offers with better rates. Remember that results may vary, and not all lenders use Experian credit files or scores impacted by Experian Boost.

Frequently asked questions