Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

Full Bio →

Written by

Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

Full Bio →

Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Sep 29, 2020

Advertiser Disclosure

It’s all about you. We want to help you make the right car insurance coverage choices.

Advertiser Disclosure: We strive to help you make confident insurance decisions. Car insurance comparison shopping should be easy. We partner with top car insurance companies. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

Key takeaways...

  • Having decent credit is very important when you’re leasing or financing a vehicle and looking for a low-interest rate
  • A majority of companies in a majority of states will use your credit score to determine how much you should pay
  • Making late payments on your loans and credit card statements can affect your insurance rates in the future
  • Even though late payments to creditors affects insurance, late payments on insurance won’t affect your credit rating
  • You can build your credit by paying insurance with your credit card and making regular payments on the balance

Today’s economy runs almost entirely off of credit. While it is possible to live life paying cash for many things, it’s not just creditors who make decisions .

Your FICO score doesn’t just determine if you’ll get a loan or a good interest rate, it can determine if you’ll get a job, an apartment, or a professional license.

Many people know that credit will have a major affect on your ability to buy a car and what type of vehicle you’ll be able to afford. It’s shocking to learn that a similar credit file is used to decide if you’re eligible for good credit insurance rates.

Compare car insurance quotes today by using our free rate tool above.

Paying your creditors can affect your financial reputation as a whole but how does paying your insurance affect your score? Here’s what you need to know:

Table of Contents

When did people become so reliant on credit?

People didn’t always use credit to buy what they wanted. It wasn’t until the late 1960s, when credit cards became increasingly popular, that people with an income as low as $5,000 were able to secure new credit with limits as high as $60,000 each day.

Poor lending decisions led to changes in bankruptcy laws.

While most borrowers in the 1970s defaulted, it never changed how reliant people were on credit. Consumers no longer paid cash for their appliances, vehicles, and any other good they desired.

The credit culture started and never went away. In the 1960s and 1970s, your creditworthiness didn’t really matter. It wasn’t until data started to be used that creditworthiness became a thing.

Compare quotes from the top car insurance companies and save

 Secured with SHA-256 Encryption

Why is creditworthiness so important in today’s modern society?

When credit first came about, the issuing banks would make biased and discriminatory lending decisions based a person’s job title and the way that they looked.

Fortunately, laws were passed to put a stop to the prejudice as lenders started to report data and keep track of who was paying their bills. To lenders, a little data went a long way.

Now, lenders do more than report data on a paper ledger. There are three major companies that store credit-related data for creditors to look over when underwriting an application for a credit card or loan.

When someone is paying their bills and keeping their balances down, they will be deemed creditworthy.

Being creditworthy doesn’t just mean you will be able to get yourself a new car or a new home by financing the purchase.

Your financial past doesn’t just dictate if you’ll have a future in borrowing, it also dictates if you’ll be able to get the following:

  • A good job
  • A nice apartment
  • An insurance policy at a low rate

Compare Car Insurance Companies

Compare quotes from the top car insurance companies and save

 Secured with SHA-256 Encryption

Why is data so important when insurers are setting your rates?

It’d be hard to charge an insurance consumer an appropriate rate if carriers didn’t have access to any type of consumer reporting. Insurance rates are completely based on risk and the only way to assess risk and to look at patterns and experiences.

Without access to data, it’d be hard for companies to make educated underwriting decisions.

Underwriting is a routine process because it helps companies dig deeper than some applicants want to go.

Without it, the carrier would have to trust the applicant’s word instead of accessing past data and determining how likely each driver is to have a loss in the future. Credit reporting is one of the reports many insurers.

How does not paying your debt affect your insurance premiums?

Credit wasn’t always used to calculate insurance rates. You can’t be denied by an insurer for your credit alone, but having a poor credit history and a spotty record might land you a denial letter from the most strict companies targeting preferred, tier one drivers.

If you have a reputation for not paying your bills, this will be a red flag.

Insurance companies don’t and can’t look at every aspect of your credit when they’re seeing if you have a good financial reputation.

Since the entire belief is that a driver’s creditworthiness will indicate if a driver will file a claim after a loss, there’s no need to look at sections of a credit report.

Late payments and defaults will be considered when calculated an insurance score.

Compare quotes from the top car insurance companies and save

 Secured with SHA-256 Encryption

What is a credit-based insurance score?

Paying your bills late affects both your FICO score and your insurance score. Insurance companies can’t look at your traditional FICO score but they can look at a different report called a credit-based insurance score.

This is calculated by a third-party after the consumer agency has reviewed a credit file. Information that makes up the score includes:

  • Your payment history with creditors
  • The mixture of credit accounts that you have
  • Whether or not you’ve applied for new lines of credit
  • How long you’ve had specific credit cards and loans
  • How much debt you currently have in your name

Does failing to make an insurance payment affect your credit or insurance score?

You should pay all of your bills to keep a good reputation as a consumer in any industry. Companies in each marketplace communicate with each other to help them make business decisions. The insurance industry is no different than other industries.

If you don’t make your premium payments to your current insurer, it won’t be reported to any of the three credit bureaus. Since insurance isn’t a type of credit, it’s not something on your report that can lower your score.

Failing to pay can still affect your insurance score and ultimately your rates because of the reported lapse in your history.

Avoid being late on your insurance at all costs. It might not be a mistake that affects your credit-worthiness but it is a mistake that can leave you unprotected.

If you don’t have coverage, start getting quotes online and secure even a basic policy that safeguards you from loss. Compare quotes today!

References:

  1. https://www.usa.gov/credit-reports
  2. http://www.investopedia.com/terms/c/credit-worthiness.asp
  3. https://www.mygreatlakes.org/educate/knowledge-center/credit.html
  4. http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/The-History-of-Credit/td-p/19935
  5. http://www.investopedia.com/terms/c/credit-history.asp
  6. http://www.investopedia.com/articles/00/091800.asp
  7. https://www.consumer.ftc.gov/articles/0152-credit-scores
  8. http://www.consumerreports.org/cro/car-insurance/credit-scores-affect-auto-insurance-rates/index.htm
  9. http://www.naic.org/documents/consumer_alert_credit_based_insurance_scores.htm