Does paying car insurance build credit? This is a common question asked by those looking to improve their credit scores to help them save money on insurance premiums and financing. Unfortunately, while paying your car insurance premium on time is important, it does not help to improve your credit score.
While your credit report includes reported payment history, the information is related to payments on credit accounts, such as car loans, mortgages, and credit cards.
Why Paying Your Premium Payments on Time Doesn’t Help Your Credit Score.
While your insurance company may obtain your credit score when providing your premium quote, paying the premium on time doesn’t help your credit because insurance companies don’t report these payments to your credit score, according to Policy Genius.
That doesn’t mean that you should be lax on your premium payments. Instead of negative reports to a credit bureau, your insurance company may penalize late payments in other ways.
Can You Use Your Car Insurance to Help Build Credit?
Even though the insurance company will not directly report to the credit bureau, there are some clever ways that you can use your car insurance and payments to help raise your credit score or maintain a good one, as mentioned in Wallet Hub.
One option is to make your premium payments on a credit card and pay the balance off each month. Your credit card company will then report these on-time payments to the credit bureau, where they will benefit your score. You can also set your credit card as the default payment for payment, which can sometimes give you a discount on your monthly premium.
Penalties for Late Insurance Payments
While paying your insurance premiums on time may not help your credit, it won’t hurt it either. However, missing your insurance premiums can negatively affect you in other ways. Failure to pay your insurance on time can result in:
- Late fees
- Higher premiums at renewal
- Poor credit
Failing to miss a payment will not show up on your credit score since the insurance companies don’t report. Still, missing multiple payments, resulting in a cancellation, can have you sent to collections which will show up as major blemishes on your credit report.
One of the worst-case scenarios on missing payments is your insurance being canceled. This typically will not occur until you have missed two or more payments, but it can be devastating when it happens. If you drive once your insurance is canceled, you could end up with a citation. Worse yet, you could be responsible for significant medical bills and damage if you are involved in an accident after your cancellation. You may also have a harder time obtaining new insurance after experiencing a cancellation.
Your Credit Score Can Affect Your Premium Rates
You may not have to worry about the premium payment history showing up on your credit report. You will have to worry about what is on your credit report when you get your quote for new premiums. Typically lower credit scores will result in higher premiums. In fact, Self mentions a study in Texas that found that those with the highest credit score paid an average of $558 while those with the lowest credit score paid $918.
While you won’t be turned down by an insurance company based on a credit score, you can expect your premium rates to be higher.
Paying Your Insurance Premiums on Your Credit Card
As mentioned, paying your car insurance premiums on your credit card can help you build credit, but it can hurt your credit if you don’t do it properly. If you can’t pay the credit card off each month, this may not be a wise avenue to pursue.
Putting your car insurance premiums on your credit card and then failing to make payments can negatively affect your credit. Even if you make the minimum payments, but not the whole amount, you may end up paying finance charges which will cost you more in the long run.
Why Your Credit Score Affects Your Insurance Premiums
- Your driving history
- Your claims history
While it may seem strange that your credit score is used to determine rates, it has been shown by researchers to be a good predictor of how likely you are to file a claim. When someone has a lower credit score, they tend to have more claims and higher-dollar claims.
There has been some recent debate as to whether credit scores should be used to help determine premium rates. Certain advocacy groups have actually protested its use, stating that minorities will be disproportionately affected by the use of credit scores. They also claim that many people don’t understand how their credit can affect their premium rates.
Some states, such as California, Hawaii, and Massachusetts, have already done away with the use of checking credit scores.
Aside from some states restricting the use of credit history to determine the premium rates, some insurers like Nationwide have may some exceptions as well. Compare says that Nationwide has an extraordinary life circumstance policy that allows a customer to request a reconsideration on a premium affected by their credit score. They might reconsider and revise the premium if the poor credit occurred due to military deployments, serious illness, divorce, or a catastrophic event.
What to Do If You Have a Low Score
You should never just accept a low credit score. Start by checking your credit report to find the details that may be holding your credit back. You may find some negative items that you were not aware were there. If you have unexpected collections, see if you can make arrangements to settle them. If you see any discrepancies, file for a correction.
Don’t let bad credit affect your insurance premium rates. While paying your car insurance on time will not boost your credit, there are other ways to improve it to help lower your premium rates.
Check this out if you need additional information, resources, or guidance on car insurance.
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