Auto Insurance Bills: Credit Score Impact Explained

Auto insurance bills can have an impact on your credit score in several ways. Firstly, while simply paying your auto insurance bills on time does not directly improve your credit score, consistently paying with a credit card and clearing the balance each month can help build your score. This is because credit agencies view this behaviour as a sign of financial responsibility. Conversely, late or missed auto insurance payments can lead to debt collection reports, which can negatively impact your credit score for up to 10 years. Additionally, in most states, auto insurance companies use an individual's credit score to determine their insurance rate, with lower scores often resulting in higher rates.

Auto insurance companies don't report on-time payments to credit bureaus

However, failure to pay insurance bills can lead to negative entries on your credit report if the insurer turns them over to collection agencies. This can lower your credit score and make it more difficult to obtain credit in the future.

While your credit score is only one of many factors that affect your auto insurance rates, it is an important one. Individuals with higher credit scores are considered less likely to file a claim and are therefore offered lower rates.

Not paying your auto insurance won't affect your credit score, but it may impact your coverage

While your auto insurance payment history will not directly affect your credit, failing to pay your auto insurance premiums can cause other issues.

Firstly, insurance companies do not report payment histories to credit rating agencies, so a late payment should not impact your score. However, if you fall into significant arrears or don't pay your bill at all, the company may initiate debt collection activities, which could find their way onto your credit report and be accessed by future lenders.

Secondly, some companies may automatically suspend coverage if they do not receive an installment on time or within a grace period. Should this happen, you have an auto insurance lapse, and if you continue to use your vehicle, you may be committing a traffic offense. Most states require that you have a minimum level of insurance coverage, and if you are stopped by a law enforcement officer, you could face a fine, or they may impound your vehicle. Also, you may be personally liable if you cause a crash while driving without insurance.

Thirdly, insurance companies notify the state DMV whenever there is a lapse in coverage. If you fail to make payments on time, you may get a letter from the DMV, and there is a risk that they could suspend your vehicle registration and driver's license.

Finally, while your credit score is just one of many factors that insurance companies use when determining your rate, it can have a major effect on your car insurance rate. A higher credit score generally decreases your car insurance rate, while a lower credit score tends to increase it.

A low credit score could cost you hundreds in car insurance every year

In most states, a low credit score could cost you hundreds in car insurance every year. This is because insurers create proprietary credit-based insurance scores based on consumer credit data. Bankrate's research shows that someone with an excellent credit score of 800 or above pays an average annual rate of $2,031 for full coverage car insurance. On the other hand, someone with a poor credit score may pay an average of $4,366 or more.

According to a study by Bankrate, drivers with poor credit (a credit score under 580) pay 97% more, on average, for full coverage car insurance premiums than their counterpart drivers with exceptional credit (a credit score above 800). The study summarizes that that's an average difference of more than $1,700 every year.

While auto insurance companies don't report on-time payments to the credit bureaus, you could get credit for your premiums with Experian Boost. If you've missed an auto insurance premium, it's important to pay the bill as quickly as possible or reach out to your insurer to avoid having the bill sent to collections.

At the same time, it's important to build and maintain a good credit history to take advantage of lower rates on your auto insurance. Check your credit score and review your credit report to evaluate your credit health and determine whether you can make improvements.

In most states, your insurance company can check your credit score each time you renew your policy. If your credit score plummets after you initially enroll with a certain company, that lower score could come back to haunt you in the form of increased rates when you renew your policy or switch providers. However, insurance companies can't change your rate in the middle of your policy's term.

If your car insurance payment is breaking the bank, consider shopping around for a better rate. Requesting a car insurance quote doesn't cause a hard pull of your credit report, so getting estimates from multiple companies won't hurt your credit score.

If you're looking for a cheap auto insurance company, get a quote from Geico. CNBC Select ranks Geico as the best overall car insurance provider, and it has the lowest average annual premium for full coverage car insurance of the companies we've reviewed. It also has a relatively low offering for minimum coverage car insurance.

If you'd rather stick with your current insurance company, there are still a few ways you can save. One is by reassessing your coverage. If you have full coverage car insurance, you're the most covered you can possibly be on the road. However, full coverage car insurance likely costs way more than the minimum coverage required by your state. If you're an especially careful driver, you could save by choosing a less comprehensive coverage plan.

If you're still reaching for more savings on car insurance, you may have to work to raise your credit score. One of the simplest ways to raise your credit score is by making bill and debt payments on time. If you struggle to do so, you should consider setting up autopay for your bills so that you never miss a payment.

Also, keep an eye on your credit utilization rate, which is the ratio between your spending and your total credit limit. Experts recommend keeping your credit utilization rate below 30%, though below 10% is even better. To accomplish this without shrinking your monthly budget, you could call your credit card issuer and request a credit limit increase, which would decrease your utilization ratio as long as you don't increase your credit card spending.

You could also request a credit report and dispute any errors that could be harming your score. In 2021, CNBC reported that more than one-third of Americans found errors on their credit reports. Using a credit-boosting service like Experian Boost can help you get credit for making monthly utility payments. Experian Boost connects to your bank account and scans for recurring, on-time payments, like streaming subscriptions and phone bills. These payments typically aren't reported to credit bureaus, so Experian Boost could increase your credit score with payments you already make.

Insurance companies may check your credit score before quoting an auto insurance premium

While auto insurance companies do not report to credit agencies, they may check your credit score before quoting an auto insurance premium. This is because your credit score can influence how much you pay for car insurance. A higher credit score generally leads to lower insurance rates, while a lower credit score can result in higher premiums. This is because insurance companies typically associate lower credit scores with a higher likelihood of filing insurance claims in the future.

Insurance companies use your credit score to calculate a credit-based insurance score, which helps them predict the risk of you filing a claim. While the exact calculation methods may vary, credit-based insurance scores usually place more weight on payment history than traditional credit scores. By checking your credit score, insurance companies can assess your financial situation and determine the appropriate insurance rate.

It is important to note that getting a quote or shopping around for insurance does not affect your credit score. These inquiries are typically done through a "soft pull," which does not impact your credit rating. However, if you consistently fail to pay your insurance premiums and your account goes into default, it may be turned over to a collection agency. At that point, the collection agency can report the debt to the credit bureaus, potentially lowering your credit score.

If you pay your auto insurance with a credit card, you could improve your credit score

Paying your auto insurance with a credit card can help improve your credit score, but only if you pay down your credit card balance every month. This is because, while insurance companies don't report to credit bureaus, your credit card payments do. Late payments on your credit card bill can result in interest charges of up to 20%.

Your auto insurance payment history won't affect your credit score, and neither will missing a payment. However, if you fall into significant arrears, the insurance company may initiate debt collection activities, which could appear on your credit report.

Your credit score can, however, affect your auto insurance rates. Insurance companies use what's called a credit-based insurance score to calculate premiums, and having good credit can help you save money. A credit-based insurance score tries to predict the likelihood that a consumer will file insurance claims that will cost the company more money than it collects in premiums.

In the US, some states—including California, Hawaii, Washington, Massachusetts, and Michigan—strictly limit or prohibit insurance companies from using credit information to determine rates. In these states, your credit score won't affect your insurance rates, regardless of how good or bad it is.

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