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.

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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.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Aug 2, 2021

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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 will use your credit score to determine how much you should pay for your insurance premium
  • 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. Companies want to see that you have a record of making payments on time and meeting your obligations. If you pay for a house in cash, for example, they have no way of telling.

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.

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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:

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. During this time, home loans also became increasingly popular as home prices rose. It’s only been recently that people have been able to get large loans to buy a house instead of paying cash. Being able to buy without putting at least 20% down is an even newer phenomenon.

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.

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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. Unfortunately, that still happens.

While we may think of things like redlining mortgages and denying people credit or insurance based on their race, it continues to happen.

Mortgage lending laws require lenders to report the demographics of people they lend to, and they have to lend to people in the communities around their offices.

Things like where you live and what you drive factor into insurance, which can be a backdoor to charge certain economic groups and races more. Credit scores provide a more objective source of information about the type of client you have.

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

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Why is data so important when insurers give you an insurance quote?

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.

For auto insurance, companies might ask how you drive, how many tickets you have, if you’ve been in an accident recently, etc. If you let your policy lapse due to non payment or if you drove uninsured, you may present a higher risk. In fact, studies show lower credit score can mean a higher likelihood of you filing a claim, which would increase your insurance premium.

Underwriting is a routine process because it helps companies dig deeper than some applicants want to go. Then they charge based on how much risk they think you present. If you have a history of not paying your insurance, even if you had another policy at the time, you may be more likely to not pay your new carrier.

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 huge 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. They rely largely on your score and anything directly related to your insurance history.

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.

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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. https://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. https://www.investopedia.com/terms/c/credit-history.asp
  6. https://www.investopedia.com/articles/00/091800.asp
  7. https://www.consumer.ftc.gov/articles/0152-credit-scores
  8. https://www.consumerreports.org/cro/car-insurance/credit-scores-affect-auto-insurance-rates/index.htm
  9. https://www.naic.org/documents/consumer_alert_credit_based_insurance_scores.htm