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Thinking of insuring your next vehicle and wondering how that might impact your overall credit score? Will having auto insurance help your credit score at all? Hurt it? Do nothing to it? We researched these very questions to bring you this detailed post.
Broadly speaking, no. Merely taking out a car insurance policy does not impact your credit score in any way. Insurance laws vary by state, but auto insurance companies generally do not report late or missing car insurance payments to credit bureaus. This is because the insurance company doesn't actually extend you credit, the way that a dealership might extend you a car note if the bank won't.
However, there is a lot of misunderstanding around this topic because insurance adjusters need to obtain information about you to determine risk tolerance and credit reports can be easily pulled. Researchers also try to get ahold of information like premiums and likelihood of late payments relative to other quantifiable data like income level, car price, and credit rating to examine and report on trends.
While your car loan would have an actual effect on your credit score due to the actual extension of credit and show up on your credit report, your car insurance doesn't. To better understand the relationship between car insurance and your credit score, here's what you need to know.
Is Car Insurance Affected By Credit Score?
While your actual car insurance payments do not affect your credit score, either way, the same is not true of the insurance company checking your credit score.
The nationwide average cost of car insurance is $1,691 per year. This number can be affected based on your credit score among other factors that the insurance company looks at.
Not every insurance company will do a credit check before deciding to give you a policy. Some states outlaw this practice because it disproportionately hurts people with poor credit from student debt, bankruptcy, and other indicators of low income.
Does Paying Your Car Insurance Build Credit?
Unfortunately, even if your insurance company insists on a credit check before insuring you, having a car insurance policy and making payments does not actually build credit regardless of how long you hold the policy.
Because insurance companies don't report timely or late payments to credit bureaus, there is no effect on your credit score. However, if you miss payments, you can face other consequences like driving uninsured and finding it difficult to get insurance again (and often at a higher rate).
Do Car Insurers Do a Credit Check?
Many car insurers will do a credit check before deciding to insure you. It seems counterintuitive since your car insurance payments do not affect your credit score, but insurance companies use multiple factors when determining what rate to charge you. Insurance adjusters typically examine eight factors:
- Credit report (unless you're in a state with a ban, or the company has opted out of this practice)
- Your driving record
- Your age
- Car make, model, and year
- Annual mileage
- Your vehicle's safety features
- Primary use for the car
Depending on the insurance company's specific guidelines, local laws, and your location, car insurers can use anywhere from 30-300 factors to determine how individual policyholders get their rates. Drivers under 25 or over 65 are likely to pay higher premiums than a 35-year-old driver since they tend to be a risk factor due to inexperience or declining vision, respectively. While a new car with less mileage is likely to get a more favorable rate than a used car with a lot of mileage, an expensive car is going to cost more to insure.
Due to the mileage factor used by many insurance companies, this is partly why people with lower incomes and/or bad credit tend to pay disproportionately higher rates: if a used car with a lot of mileage and high likelihood of breaking down or causing accidents is your only option for transportation, there is a high correlation between drivers with this type of car and drivers with bad credit. Hence, some insurance companies use low credit scores as an indicator of high risk even though it's a condition of poverty that further compounds it by charging higher rates than the national average.
To date, California, Massachusetts, and Hawaii are the only states where it is illegal to use credit scores when determining car insurance rates. Other factors likely to disproportionately hurt lower-income drivers like older cars with more mileage and/or less robust safety features can still effectively raise your premiums, but you will not have your credit pulled and used in the premium calculation if you reside in any of these states.
Does Good Credit Lower Car Insurance?
If credit checks for car insurance are legal where you live, you may have to shop around for different rates as it is but especially if you have poor or fair credit. The difference is enormous since the average auto insurance premium is $2,411 if you have a poor credit score(under 600) while excellent credit scores (over 800) can result in an average premium of $1,130--effectively less than half.
Improving your credit before applying for car insurance can drastically reduce your premium along with getting you a more favorable rate on a car note.
Does a Car Accident Affect Your Credit Score?
The actual act of having a car accident does not directly impact your credit report. Whether you have a weather-related accident or a severe DUI offense, your driving record could be impacted and it will affect your car insurance rate but your credit report is not affected.
However, you may have debts that arise from the accident. It's estimated that car accidents cost about $44 million in lost wages and medical bills, without counting the medical expenses, legal fees, and property damage costs that can arise from permanent disabilities and crash site recovery efforts. You may run up your credit cards while you're unable to work, especially if you lose your job in the process. Medical bills, judgments for other injured peoples' medical expenses, and property reimbursement are often what cause people to fall into accident-related debt. Repair bills or having to completely replace your vehicle are also debt risks.
The car accident itself doesn't impact your credit score, but any events and damages arising from the car accident can have a ripple effect on your credit score if you don't have enough savings or health coverage to defray these costs.
Car insurance itself has no impact on your credit rating since insurance companies do not extend credit or send bills to collections, they just curtail your coverage in the event of prolonged non-payment. While late or missing payments won't affect your credit, you should still stay on top of your payments so you don't get charged late fees or risk losing your coverage. There may be a grace period offered by the insurer if you miss a payment due to extenuating circumstances like medical emergencies, job loss, or fleeing domestic violence so be sure to notify your insurer if you need to take advantage of this grace period.