Can My Credit Score Affect My Car Insurance Costs?

If you believe that your credit score will only affect the interest rate that you will pay on your next car loan, think again. Credit scores are now used to compute the level of car insurance premiums assessed by insurance underwriters. While it is easy to argue that this should not be happening, the reality is that in many cases it does.

Car insurance premium amounts work in an inverse relationship to your credit score.

In simple terms, when your credit score goes up, your car insurance rates should decrease. Conversely, if your credit score declines, your car insurance rates may start to climb. Like the interest rates on loans at the bank, you will get the discounts when you should not really need them and the price hikes when you cannot afford them. Generally, your car insurance premiums will work against your financial situation when it is in a decline.

Premium rates for car insurance are not as sensitive to your credit history as bank loans are.

Unlike your credit card companies, your car insurer is not likely to tap on your credit rating every few months just to see if it can boost your premiums. Most of the time, you will not see the penalties for a low score or the benefit of an improved credit score until you make some type of change to your policy. Even at that point, it is possible that if you are simply adding a vehicle to an existing policy, you will not be assessed a higher premium if your credit has taken a small hit recently.

The adjustments to your car insurance costs will not be as big as interest rate hikes can be.

Since the insurance companies do not have any real risk other than you might fail to pay your premiums on time, your credit history is not quite as significant to them. They do claim that studies have shown that people with poor credit are sometimes inferior drivers. However, this has not been substantiated to such a degree to make it a sure bet. Regardless of their claims, not paying an insurance premium is not quite the same financial problem for an insurance company as a loan default is for a bank.

Insurance companies like to look at credit scores to see if you are likely to keep your insurance in force over a longer time frame.

When car insurance companies set their premium rates, they tend to base it on the idea that they will be getting from six months to three years worth of premiums on the policy. In this way, some of the costs of issuing a policy can be spread over a longer period of time. If you drop your insurance in a couple of months because you cannot afford it, the insurance company is put in a situation where they lose money on you. By increasing the premium amount, it allows the insurer to recover these initial costs more quickly and maximize the potential for a profit.