Does Car Insurance Help Your Credit Score?

The relationship between car insurance and credit scores is often misunderstood. Understanding how these two financial aspects interact can provide clarity for consumers.

Does Car Insurance Directly Build Credit?

Paying car insurance premiums does not directly contribute to building or improving a credit score. This is because car insurance payments are typically considered service payments, rather than a form of borrowed money or a credit obligation. Insurance companies generally do not report these regular premium payments to the three major credit bureaus: Experian, Equifax, and TransUnion.

Unlike credit cards, mortgages, or installment loans, car insurance is a contractual agreement for coverage, not a lending product. Traditional credit accounts establish a payment history, a significant factor in credit score calculations. Car insurance payments do not appear on credit reports to positively influence creditworthiness.

While direct credit building does not occur, some specialized services, like Experian Boost, allow for the inclusion of utility and insurance payments in credit reports. This can potentially help improve a FICO Score. However, this is an opt-in service and not standard practice by insurance providers.

How Car Insurance Can Indirectly Impact Your Credit Score

Although paying car insurance premiums on time does not build credit, financial mismanagement can negatively affect a credit score. Unpaid premiums and subsequent collection activity are the primary concerns. Consistently missed premiums can lead to policy cancellation due to non-payment.

If an outstanding balance from an unpaid premium is not settled, the insurer may send the debt to a collections agency. This agency can report the collection account to the major credit bureaus. A collection account on a credit report can significantly lower a credit score and typically remains for up to seven years from the original delinquency date.

In situations involving claims, if an individual is liable for damages and fails to meet financial obligations, such as an unpaid deductible, these could be sent to collections if not resolved. Similar to unpaid premiums, such collection activities would appear on the credit report and negatively impact the credit score. Managing all financial commitments related to car insurance is important to avoid adverse credit consequences.

How Your Credit Score Influences Car Insurance Rates

An individual’s credit score can influence the cost of car insurance. Many car insurance companies use “credit-based insurance scores” to help determine premiums. These scores are not identical to standard FICO or VantageScore credit scores, but they are generated using information from credit reports.

Insurers use these scores because statistical studies suggest a correlation between credit behaviors and the likelihood of filing insurance claims. A credit-based insurance score serves as a risk assessment tool, indicating the potential for future insurance losses. Factors influencing these scores include payment history, outstanding debt, length of credit history, new credit, and the mix of credit types.

A higher credit-based insurance score typically results in lower insurance premiums, while a lower score can lead to higher costs. The use of credit scores for insurance pricing is regulated and prohibited in some states, including California, Hawaii, Massachusetts, and Michigan. In states where permitted, a credit-based insurance score is one of several factors insurers consider when setting rates, alongside driving history, claims history, and vehicle details.