Understanding the Impact of Car Insurance on Your Credit

When it comes to managing your finances, understanding how different aspects of your life affect your credit score is crucial. One area that often raises questions is car insurance. Does paying your car insurance build credit? Does not paying it affect your credit score? And how does your credit score impact your insurance rates? In this comprehensive guide, we will explore these questions and provide you with actionable insights.

Does Paying Car Insurance Build Credit?

One common misconception is that paying your car insurance premiums on time will help build your credit. However, car insurance companies do not report your premium payments to the credit bureaus, so your policy won’t appear on your credit reports. This means that simply paying your car insurance on time will not directly improve your credit score.

That said, there is a way to get credit for on-time auto insurance payments on your Experian credit report. By adding your insurance bills to Experian Boost®, you can potentially improve your FICO® Score based on your Experian credit report. Experian Boost is a free feature that allows you to add certain monthly bills, including eligible utility, internet, streaming, rent, insurance, and other payments, to your Experian credit file. This can be a useful tool for those looking to enhance their credit score.

Does Not Paying Car Insurance Affect Your Credit?

Just as on-time payments don’t get reported to the credit bureaus, the same is true for not paying your policy premium. However, if you fail to pay your car insurance premium, the insurance agency may send the unpaid premium to collections. At that point, the collection agency can report the debt to the credit bureaus, ultimately hurting your credit score.

What Happens if You Don’t Pay Your Insurance Bill?

If you miss an auto insurance payment, insurers typically offer a grace period before canceling your policy. Depending on the insurer and your state of residence, this period can be as long as 30 days. Your insurance company will notify you 10 to 20 days by mail or email before canceling your policy. If you can’t pay and don’t cancel the policy on your own, the policy will lapse, resulting in several potential consequences:

• Loss of Protection: You won’t have any financial protection in the event that you get in an accident or your vehicle sustains damage or other losses. If you cause an accident without sufficient insurance coverage, the other party could sue you.
• Legal Violations: State laws require that you maintain at least a minimum amount of liability coverage. If you fail to meet that requirement, you could face fines and a suspension of your driver’s license.
• Difficulty Getting New Coverage: Going a single day without car insurance can result in a higher rate on a new policy. What’s more, if your state requires you to obtain an SR-22 form to prove you have the minimum amount of liability coverage, some insurers may not even be willing to offer you a policy. If they do, it can get even more expensive.
• Vehicle Repossession: If you have an outstanding auto loan or lease on your vehicle, your lender likely requires that you maintain both collision and comprehensive coverage. Once the insurer cancels your policy, it’ll typically send a letter to your lender. If you don’t replace your coverage, you’ll be in violation of your loan or lease agreement, and the lender has the right to repossess the vehicle.

Does Canceling Car Insurance Affect Your Credit?

As long as you don’t have any unpaid premiums that could be sent to collections, canceling your auto insurance policy won’t have any impact on your credit score. However, you may be subject to the other consequences mentioned above if you don’t replace the canceled policy with a new one. Even if you’re selling your car with no plans to buy a new one, it’s recommended that you obtain non-owner car insurance to avoid potential rate increases in the future due to not having continuous coverage.

Does Your Credit Affect Your Insurance Rates?

According to the National Association of Insurance Commissioners, 95% of auto insurance carriers use what’s called a credit-based insurance score to calculate premiums in states where the practice is allowed. The score is based on your credit history but isn’t the same as the traditional FICO® Score that lenders use, though it considers many of the same factors.

States that prohibit or limit the practice of using credit information in insurance include California, Hawaii, Maryland, Michigan, and Massachusetts. Additionally, Utah and Oregon have prohibited using credit histories for setting rates in certain situations. Even in states where there aren’t such limitations, insurance companies typically can’t use a credit-based insurance score as the sole basis for increasing rates or for denying, canceling, or refusing to renew a policy. So, while a low credit score alone may not be enough to cause a premium hike, it can have that effect if there are other factors at play.

The Bottom Line

While auto insurance companies don’t report on-time payments to the credit bureaus, you could get credit for your premiums with Experian Boost. If you’ve missed an auto insurance premium, it’s important to pay the bill as quickly as possible or reach out to your insurer to avoid having the bill sent to collections. At the same time, it’s important to build and maintain a good credit history to take advantage of lower rates on your auto insurance. Check your credit score and review your credit report to evaluate your credit health and determine whether you can make improvements.

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