Everyone knows that car insurance premiums are affected by many factors, such as the car’s age, model, and the policyholder’s driving history. But can you imagine even your credit score affects the premium of your four wheeler insurance?
Credit score is so important in premium calculation that even vehicle insurance calculators provided by reliable insurers also consider this factor while calculating the estimated premium of your chosen 4-wheeler car insurance policy.
But how does credit score affect the car insurance premium? Keep reading the article to understand the connection between credit score and car policy premiums and learn how to manage it.
What is Credit Score in Insurance?
A credit score in the context of insurance refers to a numerical representation of an individual’s creditworthiness. These scores are generated by considering the various factors related to your individual financial history and behaviour. Financial behaviour simply means your discipline towards paying your financial dues, such as filing tax returns and making credit card payments, home or car EMI, and more. Insurance companies consider your credit score when calculating your policy premium.
What are some Key factors that Contribute to an Individual’s Credit Score?
- Payment History: Timeliness of payments for credit cards, loans, and other bills.
- Credit Utilisation: The ratio of credit used to the total credit available.
- Length of Credit History: The time since accounts were opened and used.
- Types of Credit: The variety of credit accounts, such as credit cards, mortgages, and loans.
- New Credit Applications: The number of recent credit inquiries or applications.
- Public Records: Instances like bankruptcies, liens, and legal judgments.
What is a Good Credit Score?
| Range | Credit Score | Description |
| 300 – 579 | Poor | It Indicates a higher risk of defaulting on credit obligations. |
| 580 – 669 | Fair | It shows improvement from poor credit but still presents challenges. |
| 670 – 739 | Good | It represents a history of responsible credit management. |
| 740 – 799 | Very Good | It indicates a high level of creditworthiness. |
| 800 – 850 | Excellent | It shows the highest level of creditworthiness. |
How Your Credit Score Affects Your Car Insurance Premium?
The credit score and the car insurance policy premiums are inversely proportional to each other. It means:
- Lower credit score = Higher car insurance premium
- Higher credit score = Lower car insurance premium
The simple maths behind considering the credit score as one of the factors in determining the car insurance premium is that a person with a higher credit score is more likely a responsible person when it comes to managing their finances.
Such a person is more likely to pay the car insurance premiums on time and less likely to default on their payments. It is why your credit score influences the pricing of insurance premiums.
In comparison, a person with a lower credit score is financially irresponsible and might have outstanding payments on credit cards, due loans, or any other financial liabilities they cannot address.
With such existing financial liabilities, a person may find it difficult to manage new financial commitments, like car insurance policy premiums.
A higher possibility of default on car insurance premiums results in a higher risk for the insurer, and results in higher car insurance premiums.
This data-driven correlation has made insurance companies consider credit scores essential when calculating premiums.
How to Manage the Impact of Your Credit Score When You Buy Car Insurance?
| Tips | Description |
| 1. Regular Monitoring | ● Regularly review your credit score report for errors or discrepancies that could negatively affect your score.
● Get credit score inaccuracies corrected. |
| 2. Timely Payments | Make timely payments for bills, including credit card bills and loans, to maintain a positive payment history and boost your credit score. |
| 3. Reduce Debt | Lower your overall debt and credit card balances to improve your credit utilisation ratio. |
| 4. Limit New Credit Applications | ● Minimise new credit applications, as each can temporarily decrease your credit score.
● Avoid filing excessive applications, especially when shopping for insurance. |
| 5. Maintain Old Accounts | Keep old credit accounts open, even if they are not actively used. It helps maintain a longer credit history, which is viewed positively. |
| 6. Communication with Insurer | If you believe your credit score does not accurately reflect your financial responsibility, communicate with your insurer. Some states offer grace periods to address credit-related issues. |
Final Thoughts
Your credit scores greatly impact your car insurance premium as it depicts your likelihood of paying the car insurance policy premium with discipline. It influences the calculation of your premium on car insurance.
Thus, understanding the connection between credit score and car policy premium and knowing how to manage the impact of credit score allows you to try getting lower car policy premiums. Ensure you manage a good credit score to save on insurance costs by getting insurance coverage at lower premiums.
