Car insurance premiums can be costly. So, wouldn’t it be nice to be rewarded for making timely payments? The upside is you’ll avoid lapses in coverage by paying on time, but doing so doesn’t directly build your credit score.
Here’s what to know about the relationship between car insurance payments and credit. This guide also explores a tool you can use to boost your credit rating with on-time auto insurance payments.
How Car Insurance Works
Car insurance protects your assets if you’re involved in an accident or if your vehicle is stolen or sustains damage. You pay premiums directly to the insurance company in exchange for coverage. The amount you pay depends on your age, gender, driving record, location, vehicle and coverage options you select.
If you need to file a claim, you must pay the auto insurance provider a deductible before coverage kicks in. This amount is agreed upon when you sign up for coverage and is specified in the policy documents.
A higher deductible generally means more affordable premiums, as the insurance company assumes less risk.
The Relationship Between Car Insurance and Your Credit
Again, paying your car insurance does not directly affect your credit score. That said, there are ties between the management of your policy and your credit history.
How Credit Scores Are Calculated
Before diving into car insurance and credit reporting specifics, it’s worth understanding how credit scores are calculated. The FICO score, which is used by more than 90 percent of lenders and creditors to make lending decisions, consists of five components:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
The Role of Credit Bureaus
There are three major credit bureaus to be aware of – Experian, TransUnion and Equifax. Each exists to collect and maintain data about your credit usage. This information is then compiled to generate credit reports and corresponding credit scores.
Can Car Insurance Be Reported to Credit Bureaus?
In short, no. That said, skipping out on premium payments could mean bad news for your credit score. More on this shortly.
Can Paying Car Insurance Build Credit?
Although car insurance payments typically aren’t reported to the credit bureaus, you can use a free tool to get credit for paying on time. It’s called Experian Boost, and it lets you add your eligible insurance bills to your Experian credit report to build your FICO Score based on Experian data in real time.
Visit the website to learn more about Experian Boost and other valuable resources the credit bureau offers. You can also sign up for a free account to access your credit score and credit report free of charge.
Situations Where Car Insurance Might Impact Credit
Car insurance payments typically aren’t reported to the three major credit reporting agencies. However, your credit score could take a hit if you fail to make premium payments and the delinquent balance is transferred to a collection agency.
Using a credit card to pay for car insurance could also impact your credit score. If you manage the card responsibly, your rating could improve. But, carrying a steep balance or making late payments could have the opposite effect.
It’s also worth noting that some states allow insurance providers to use credit-based insurance scores when setting premiums. So, a strong credit history could work in your favor.
Indirect Ways Car Insurance Payments Could Influence Credit
Here’s a closer look at how car insurance payments affect your credit profile.
Timely Payment Habits
As previously mentioned, using a credit card to pay car insurance premiums can help build a positive payment history. This is especially true if you pay your credit card bill on or before the due date each month.
Keep in mind that paying late – or 30 or more dates following the due date – could mean negative marks on your credit report and significant damage to your score.
Utilization of Credit Cards for Insurance Payments
Your credit utilization rate can also be impacted if you use your credit card to pay for car insurance. It is the amount of credit used in relation to your total credit limit and should be kept at or below 30 percent to preserve your credit rating.
If the card you use has a smaller credit limit, you risk exceeding this threshold and dinging your credit if you cannot pay the balance in full each month. The other downside is the hike in borrowing costs that result from carrying a balance from month to month.
Are There Any Benefits of Using Insurance Payments to Build Credit?
For starters, Experian Boost only impacts your Experian credit profile. So, you won’t see the positive payment history from auto insurance payments on your TransUnion and Equifax reports.
That said, using a credit card to pay your insurance premiums still has its perks. You can demonstrate responsible credit management by paying on time and keeping your balance low. Plus, you can capitalize on rewards programs and cashback offers if available on your card.
What are the Potential Pitfalls and Risks?
The biggest downside is the risk of default if you’re unable to make timely credit card payments. Your score will take a hit if the account is reported as late after the 30-day mark. And you can expect a penalty APR with some credit cards, which increases future borrowing costs.
Carrying a balance from month to month also gives credit card companies more time to collect interest from you. This is another downside of using your credit card to pay for car insurance, particularly if you can’t pay the balance in full each month.
Final Thoughts on Building Credit Through Car Insurance Payments
Paying your car insurance on time might give you peace of mind and help you avoid premium increases in the future. But it won’t directly build your credit, as it isn’t a loan or line of credit that’s reported to the credit bureaus. The upside is you can use Experian Boost to get credit for your on-time payments. Navigate to the website to learn more.
FAQs About Car Insurance and Credit Building
Credit card accounts, loans and lines of credit are used to build credit over time. However, rent, utility bills, and insurance payments are generally not included in credit reports unless you opt to include this alternative payment history through a tool like Experian Boost.
There are several ways to give your credit rating a boost. Payment history is the most significant component, so paying on time is vital. It’s also essential to keep your credit utilization rate at or below 30 percent (or 10 percent for the best chance at a strong credit score). Also, refrain from closing old credit lines so your credit age doesn’t take a hit and maintain a healthy mix of installment and revolving credit. And only apply for new credit as needed.
Not directly. That said, you can use Experian Boost to have timely car insurance payments added to your Experian credit report.
No, car insurance companies do not report premium payments to credit bureaus. However, if an unpaid balance is sent to a collection agency, it could appear on your credit profile as a collection account.
