For this reason, you may be wondering whether all your regular monthly bills are taken into account to determine your credit score, such as your car insurance.
In this article, we take a look at how your car insurance payments may or may not help fix a low credit score or keep your credit score looking good.
Firstly, What Is a Credit Report?
A credit report is a personalized, detailed breakdown of your credit history. This report is prepared by a credit bureau.
Credit bureaus collect financial information about you and your financial behavior from various sources. Based on this information, they allocate a score to you which is known as a credit score.
Your credit score affects how much credit you are able to get from lenders. This will impact whether you are able to buy a house or a car and pay it off, or be allowed to own credit cards and take out personal loans.
In the United States, three major credit bureaus are:
If you are curious about your credit score, you can get one free report from any of these credit bureaus per year.
Will Car Insurance Appear on Your Credit Report?
When you choose to pay your car insurance as a single payment, your credit score will not be affected at all.
However, if you make your car insurance payment on a monthly basis, then things do change.
When you opt to pay for your car insurance every month, you are essentially entering into a credit agreement with your insurance company.
In other words, they are providing you with a year’s worth of car insurance coverage, which you can pay over 12 months.
This agreement will form part of your credit history and if you happen to pay late at any time, your credit score could go down.
What are the Consequences of Missing a Car Insurance Payment?
If you are very late with an auto insurance payment and your account is sent to the collections department of your car insurance company, this may negatively impact your credit score.
The biggest consequence of not having paid your car insurance premium is that you may not be covered by insurance while you drive.
Generally speaking, car insurance companies will only cover you if your car premium payments are up to date.
In addition to this, if you live in a state where car insurance is mandatory and your insurance has lapsed, you may face civil or criminal charges.
Do Car Insurance Companies Check Your Credit Score?
Most auto insurance companies check credit reports to help them decide on the premium that they should offer you.
There are two different types of credit that they check. These include:
Soft credit check
A soft credit check is simply a search that a company performs to see whether you are who you are saying you are. They will check your credit file and confirm your personal information.
During this check, you will not be penalized based on your credit history or profile. In addition, this check does not affect your credit score, so having a poor credit score does not matter with a soft credit check.
Only you can see how many checks have been done on your name.
It’s important to note that if you pay for your car insurance up front, your insurance company will only do a soft credit check.
Hard credit check
If you are looking for a car insurance policy where you pay monthly, then your insurer will typically run a hard credit check.
This check involves them looking at your credit history and score, and then deciding if they want to extend credit to you.
These hard credit checks stay on your credit report and are visible to anyone who happens to run a credit check on you in the future.
Having many hard checks on your credit report can lower your credit score—particularly if you keep getting rejected.
This is because when you make a lot of credit applications, it can look as though you are having financial trouble.
It is important to know that before a company runs a hard credit check on you, they need to inform you first that they intend to do so.
Can a Low Credit Score Impact Your Car Insurance Policy Premium?
Insurance companies will work out the price that you pay for your car insurance based on how much of a risk they consider you to be.
Here are some of the factors that will determine the car insurance rate that you’ll need to pay your auto insurance company monthly:
- Make and model of your car.
- Location (zip code) where you park your car.
- Your driving history and habits.
- The type of coverage that you choose.
- Your credit score.
A low credit score will make it seem as though you are not good at handling money or managing debt.
Typically, people with low credit scores are more likely to make late payments and have a bad payment history. These people are a higher risk to insure.
In addition, some data has shown that people with low credit scores are more likely to make a claim.
For this reason, car insurance companies tend to increase premiums for people with low credit scores.
Will a Lower Credit Score Impact the Deductible on Your Car Insurance?
Just like your car insurance premium, the deductible that you agree to pay your insurance company will depend on your credit score.
The personal information that your insurer uses to determine your car insurance premium is also used to decide on the deductible you’d need to pay.
This personal information will include your:
- Full name.
- Date of birth.
- Social Security number.
The greater the risk you are to the insurance company, the higher the deductible they are likely to agree on. This is so that they have less financial responsibility in the event of a claim.
Key Point: What Is a Deductible?
A deductible is the amount of money that you will need to pay out of pocket toward a claim before your insurance company will contribute.
For example, if the cost of repairs to your vehicle after an accident is $5,000 and your deductible is $500, this means that your insurance company will only pay $4,500 toward the repair work that needs to be done.
When You Shop for New Car Insurance Quotes, Can This Impact Your Credit Score?
The great news is that getting a car insurance quote—whether you are using a site like ours or going directly to an insurance company—won’t affect your credit score.
When you ask for a quote, an insurance company may run a soft check on you to make sure that you are who you say you are.
It is only when you formally apply for a car insurance quote that the insurance company will run a hard check on you, and this will only happen if you are wanting to pay your car insurance premium monthly.
When you do agree on a car insurance quote and take out a policy, you will be given a 14-day ‘cooling off period’ during which you can change your mind.
If at this point you decide to switch to another insurer, however, they are likely to run another hard check on your credit profile, which may impact your overall credit score.
How Can Paying Car Insurance Monthly Improve Your Credit Score?
Because a monthly car insurance policy is also seen as an installment loan, paying on time and in full every month can improve your credit score over time.
However, if you pay late or miss a payment, this will bring down your credit rating.
Setting up a direct debit arrangement with your bank is the easiest way to ensure that your car insurance premium gets paid on time.
Can Your Credit Score Be Affected If You Don’t Cancel Your Car Insurance Policy?
While canceling your car insurance policy will not affect your credit score, you will need to cancel it using the right steps.
If you pay your car insurance premium on a monthly basis, you won’t be able to achieve this by simply canceling your direct debit order.
You will need to tell your insurer that you plan on canceling, and will be charged admin fees to do so.
If you want to cancel your monthly premium, but instead just cancel the direct debit order, you’re likely to miss payments—which will reflect on your credit score for up to seven years.
How to cancel your car insurance policy correctly
Call your insurer
Provide the insurance agent with your policy number and request that the policy be canceled as soon as possible.
Check whether your policy can be canceled immediately or whether they require 30 days’ notice to cancel your policy without a penalty.
Email or fax your insurer
Some insurance companies may want you to cancel your policy in writing. If this is the case, your insurance agent will advise you where you need to send your cancellation notice, whether by email or fax.
Once the cancellation has been processed, make sure that you receive your policy cancellation confirmation in writing.
If you are moving from one insurance provider to another, make sure that there is no lapse in your car insurance coverage.
Having a lapse in your insurance coverage could result in driving without insurance, which in most states is against the law.
If you are caught driving without car insurance in place, you could lose your driver’s license, have your car impounded, and face hefty fines.
Get Cheap Car Insurance Today with CheapInsurance.com
Now that you know you can shop around for car insurance quotes without this process impacting your credit score, this may be a good time to get cheaper car insurance and save money.
Not all auto insurance policies are created equal and finding a good policy at a fair price can be a time-consuming process.
Fortunately, we are here to help you find the insurance coverage that you need—at the best possible price.
All you need to do is head to the top of this page and enter your zip code. You will find a wide selection of insurance quotes to choose from.
Once you have an idea of the auto insurance premiums that you could be paying, it will be time for you to contact the insurers that are offering you the cheapest rates to get a formal quote.
Getting car insurance should be quick, simple, and stress-free, and you deserve to get the best insurance rates possible.
At CheapInsurance.com, we’ve got you covered!