Does Your Credit Score Affect Your Car Insurance Premium?

The credit score of an individual is an indicator of his/her financial stability. Hence, it is a significant factor that decides the probability of the individual securing a credit card or a loan. However, there is talk in the insurance industry that the credit score of a customer plays a role in deciding his/her car insurance premium.

The extent of importance of the credit score in determining the premium is unknown, but insurers seem to have found that this factor could provide an indication of the risk factor associated with an individual.

What Exactly Is A Credit Score?

The credit score of a person is a numerical value that is determined based on his/her financial history. It depends on the following factors:

  • The total debt of the customer currently
  • The history of his/her debt repayments and bill payments
  • The credit available to him/her

If a person has a high credit score, he/she will find it easier to get approval for loans. The possibility of getting a better interest rate on loans is also high.

Financial institutions supply information about your financial dealings to credit bureaus. This information is then utilised by the credit bureau to calculate a numerical score that ranges between 300 and 900. The higher your credit score, the better are your chances of securing a loan in the future.

Credit Score And Car Insurance Premium:

All financial institutions take into account the credit score of a person before lending him/her money. The score essentially determines how creditworthy the individual is. It is understood that car insurance companies look at the credit score of a customer to understand the risk he/she poses to the company. This implies that the insurer will assess the credit score to determine whether the customer is likely to make premium payments on time.

Having a low credit score can imply one of the following:

  • The individual does not have an extensive track record or credit history that can ascertain his creditworthiness.
  • The individual has a poor history of paying bills and making loan repayments.

It is also understood that insurance companies make soft inquiries on the credit score of a person. These inquiries do not reflect in the credit score or cause a negative impact on the credit history.

Insurance companies take the credit report of an individual and pass it through an algorithm to calculate his/her insurance score. This score is what determines the risk you bear to the insurer.

Factors Affecting Car Insurance Rates:

It is important to understand that your credit history is only one of the multiple factors that have an impact on your car insurance premium. Some of the more prominent factors that affect your premium rate are as follows:

  • The make and model of the vehicle
  • The driving record of the individual
  • The area of registration of the car
  • Safety features available in the vehicle
  • The usage of the car
  • The engine capacity of the vehicle
  • Discounts that the individual qualifies for

So, if you have a great driving record and approved anti-theft devices installed in your car, you may still get an attractive car insurance premium quote irrespective of a poor credit score.

If you have a low credit score, you should ideally work towards improving it over a period of time. This way, you can benefit from a better premium rate at the time of policy renewal.

You should also shop around and between providers to zero in on an ideal plan.

GST Update: GST of 18% is applicable on car insurance effective from the 1st of July, 2017

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