How Your Car Insurance Can Improve Your Credit ScoreMay 01, 2016
You’re a good driver, so why is your car insurance premium so high? To start off, you might want to compare car insurance rates, but you probably know that already, right? Another reason might be your credit score. Almost all car insurers — 95 percent, according to FICO — check your credit before determining your car insurance premiums. But if your credit’s not great, don’t despair. Having car insurance can actually improve your credit score over time.
Your credit score vs. your credit-based insurance score
Your credit score is a number between 300 and 850 that represents how much of a risk you are as a borrower. If you’ve had bankruptcies, tax liens, unpaid credit card bills or debt collections, your score will be lower and it will be harder for you to get approved for credit. Don’t know your credit score? You can obtain it online, but be careful not to accidentally purchase a subscription service. CreditKarma.com is one site that provides credit scores without fees or obligations.
Car insurance companies actually consider a different type of score when they’re determining policy premiums. This is called your credit-based insurance score. Like your credit score, it’s based on your history of paying bills on time and keeping accounts in good standing, as well as any debt you might have. Opening new accounts can ding this score. Insurers do not, however, consider your job history, income or other personal information.
Why do car insurers care about my credit?
Research has shown that your credit-based insurance score is a good predictor of the likelihood you’ll file a claim. The lower a person’s score, the larger the losses incurred by the insurance company for that person, on average.
Some consumer advocacy groups protest the use of credit-based insurance scores, saying that minorities are disproportionately affected and that most customers don’t understand that their credit can affect their insurance premiums. If you live in California, Hawaii or Massachusetts, insurers are prohibited from checking your credit history. Some insurers, like Nationwide, have an extraordinary life circumstances policy that allows you to request a reconsideration of your premium if your credit has suffered because of a divorce, military deployment, serious illness or other catastrophic event.
How can my car insurance improve my credit score?
First, the bad news: Your car insurance premiums, like your cell phone payment and other monthly bills, don’t show up on your credit report. If you fail to pay your car insurance on time, however, that lapse will lower your score. You can get a credit-score boost from your car insurance if you charge it to your credit card and pay it off monthly. Building a history of timely payments is one of the best ways to improve your credit score.
If you’re wondering why your credit score seems low, check your credit report for the details. Your full credit report will show you any potentially negative items, such as unpaid accounts or liens. It’ll also show you your accounts in good standing. Don’t pay for your credit report when you don’t have to. Federal law requires each of the three major credit reporting agencies to give you one free credit report each year. You can get your free credit report here.
Buying auto insurance can be a confusing and disoriented process. We want to make sure that our users can make informed choices about their car insurance, selecting from as many options as possible. Read our Auto Insurance Buying Guide to educate yourself before you start a quote.