Does paying car insurance build credit? This is a question regularly asked by those wanting to improve their credit scores to save money on insurance premiums and financing. However, while paying your car insurance premium on time is important, it doesn't help to improve your credit score. Your credit report includes reported payment history, but the information relates to payments on credit accounts, such as car loans, mortgages, and credit cards.
Insurance's Role in Financial Planning
Similar to rent, car payments, utilities, and groceries, insurance is a regular payment that you should factor into your monthly budget. While more coverage typically results in higher premiums, opting for greater protection against unexpected expenses related to car accidents or damage can save you money in the long term.
Insurance helps safeguard your financial stability by covering repair costs or liability claims, preventing potential financial setbacks. By including car insurance in your overall financial planning, you ensure that you have a safety net to protect you from unforeseen automotive events.
Car Insurance and Credit: What's the Connection?
How Your Credit Score Impacts Insurance Premiums
Insurers often use credit-based insurance scores to assess risk. If you have a high credit score, companies view you as being financially responsible, and you may qualify for lower premiums. Lower scores may lead to higher premiums, as insurers may perceive you as a greater risk. For example, Self refers to a study in Texas that highlighted those with the highest credit score paying an average of $558, while those with the lowest score paid $918.
However, your credit score is just one of many factors that can affect what you pay for premiums. Chase explains that in addition to your credit score, insurance companies will examine:
- Your driving history.
- Your claims history.
While it may seem strange that companies use your credit score to determine rates, research shows credit rating as a good predictor of how likely a driver is to file a claim. When someone has a low credit score, they tend to have more claims and higher-dollar claims.
What's a Credit-Based Insurance Score?
A credit-based insurance score (CBIS) is a numerical rating that insurance companies use to assess the likelihood of a policyholder filing a claim and its potential cost. They derive it from your credit report, and it includes factors such as payment history, outstanding debt, and credit use. This score helps insurers determine insurance premiums, with lower CBIS scores often leading to higher rates due to the perception that the driver is a bigger risk.
Can Paying for Car Insurance Build My Credit?
Understanding Insurance's Impact on Credit Score
Car insurance claims typically don't have a direct impact on your credit score. Insurance companies don't report premium payments or claims to credit bureaus since insurance is not a form of credit. However, there are indirect ways in which insurance can affect your credit. If you don't pay your insurance premiums on time and the company cancels your policy, this could result in a past-due balance that the company reports to credit bureaus, negatively impacting your credit score.
If you have to pay a deductible after making a claim, it may affect your finances, potentially impacting your ability to manage other credit obligations and, indirectly, your credit score. Overall, it's essential to manage your finances responsibly to prevent negative credit consequences.
Comparing Car Insurance Payments and Credit Card Payments
Car insurance and credit card payments are monthly financial obligations, but they differ in several key ways.
- Purpose: Car insurance payments cover the cost of insurance for your vehicle, protecting against accidents and damage, while credit card payments involve repaying borrowed funds or purchasing on credit.
- Reporting to Credit Bureaus: Car insurance payments typically don't impact your credit score directly unless you fail to pay premiums, leading to policy cancellation and potential collections. Credit card payments directly affect your credit score, with timely payments positively influencing your credit history.
- Interest: Car insurance premiums are typically fixed, regular payments with no interest charges. Credit card payments may involve interest if you carry a balance from month to month.
- Flexibility: Credit card payments offer flexibility regarding when and how much you pay, whereas car insurance payments usually have a set schedule and amount based on your policy terms.
Fact or Fiction: Regular Payments Boost Credit Scores
Car insurance doesn't directly affect your credit score because insurance isn't a line of credit. One exception is when you pay your car insurance premiums with a credit card. In these cases, premium payments can impact your score indirectly by paying on time or, conversely, missing a payment.
The Importance of Paying on Time
While paying your insurance premiums on time may not help your credit, it won't hurt it either. Missing your insurance premiums can negatively affect you in other ways, such as:
- Late fees.
- Fines.
- Higher premiums at renewal.
- Cancellation of your policy.
- Poor credit.
Missing a payment will not show up on your credit score, as the insurance companies don't report to credit bureaus. However, missing multiple payments, resulting in a cancellation, can have your account sent to collections, which will show up as a major blemish on your credit report.
Why Insurance Differs from Other Payments
While your insurance company may obtain your credit score when providing your premium quote, paying the premium on time doesn't help your credit for two reasons. Car insurance payments are an expense you incur in exchange for a service, not a line of credit, so they don't impact your credit score. According to Policy Genius, insurance companies don't report these payments.
The Other Side of the Coin: When Car Insurance Can Hurt Your Credit
Unpaid Bills and Your Credit Score
Unpaid car insurance bills can harm your credit if you miss premium payments and the company cancels your policy, because insurers may report this information to credit bureaus. If the unpaid bills go to collections, this will show up on your credit report, further lowering your credit score. This can affect your ability to qualify for loans and credit cards with favorable terms. Ultimately, insurers may charge you higher premiums for future coverage since they assess rates based on your credit history, which can worsen your financial situation.
How Car Insurance Claims Impact Your Credit Score
Like premiums, car insurance claims generally don't directly impact your credit score because bureaus do not consider them credit transactions. However, certain claims circ*mstances can indirectly affect your credit. For example, if you cause an accident and fail to meet your obligations, the insurer for the injured driver or a business that suffered damages could report this to credit bureaus. If you have to pay a deductible or any uncovered expenses yourself, it may strain your finances, potentially affecting your ability to manage other credit obligations and indirectly affecting your credit score.
Final Thoughts on Car Insurance and Credit
Responsible financial management involves ensuring timely car insurance premium payments and effectively budgeting for them. This reduces the risk of policy cancellations and collections, helping you maintain a positive credit history. Maintaining a good credit score through responsible financial behavior can keep your premiums low and preserve your overall financial well-being.
Steven Glass
Insurance Editor
Steve Glass is a retired insurance professional with over 34 years of experience in the Property & Casualty insurance industry. Over the course of his career he led teams that handled Homeowners and Commercial property and casualty claims, Auto Medical claims, Auto Bodily Injury Claims, Catastrophe claims and Insurance Subrogation recovery efforts. He also has experience as an Insurance Subrogation Arbitrator.
