Does car insurance affect credit score?

It’s common to think of your car insurance and credit score as living in completely separate financial lanes. But their relationship isn’t so straightforward. 

Let’s look at the ways car insurance could impact a credit score - how different types of cover, claims, and payment history can influence yours, and what has no effect at all.

Credit scores and car insurance

There are two key ways that your credit score and car insurance may influence each other, which are:

1. Quotes. Your credit score can potentially affect the quotes you get from car insurance providers.

2. Payment method. How you choose to pay for your car insurance can affect your credit score.

We’ll dig deeper into these points in the next section, but first, it’s important to understand credit scores and their potential influence on your access to financial products. Here’s a quick refresher:

A credit score is a reflection of your credit health. It draws from your repayment history for loans, credit cards, and other financial commitments such as mortgages, phone contracts, and more. 

Your credit score is calculated separately by each of the three main credit reference agencies (CRAs) in the UK: Experian, Equifax, and TransUnion. Your score may vary between the different CRAs, because each has its own scoring range and calculation methods. 

With Checkmyfile, you see your information from all three CRAs in one place – it’s the most detailed credit report you can get. Start with a 30-day free trial, after which a monthly subscription applies. Cancel online anytime. 

Since each CRA may score you differently, you technically have multiple credit scores instead of a single, universal one. Your credit score(s) and your credit report play an important role in a lender determining whether you get accepted or declined for financial products, and may also impact the terms that you get offered by providers. This may also include the quotes you get for your car insurance premiums. 

When you submit your information for a car insurance quote, the insurer will likely perform a ‘soft’ credit check. This doesn't impact your credit score like a ‘hard’ check does (more on this later), but it gives the insurer an understanding of your credit health. It’s also used to verify your details. 

The information car insurers glean from a soft check may influence the premiums they offer you. For example, factors that indicate financial risk – like court information  – may lead to insurers restricting the products you have access to, or giving you higher quotes. However, other factors like your age, vehicle type, and driving history, also influence the quote you’re offered.

How does car insurance affect your credit score?

Buying car insurance, in and of itself, won’t affect your credit score – but it will if you take out a credit agreement to pay for your insurance coverage in monthly instalments. Here are two instances where this decision can affect your credit score:

1. When a ‘hard’ credit check (a.k.a hard credit search or hard credit enquiry) is triggered. If you decide to pay your premiums monthly, it’ll usually trigger a hard credit check, because you're effectively borrowing the annual cost of the insurance and repaying it monthly.

Every hard check is documented on your credit report, and companies that perform one will see all of your recent credit applications. These checks indicate that you’ve applied for credit, and while the outcome of that credit application is not recorded on your file, it does introduce some perceived risk and uncertainty. Too many hard checks within a short period of time indicates that you’re applying for a lot of credit at once, which lenders may view negatively.

Note: An insurer won’t need to do a hard check if you choose to pay for your insurance in a lump sum. 2. If you pay using a credit card. Paying for your car insurance using your credit card might affect your credit score. If it’s an annual lump sum payment made on a credit card, downsides will only occur if you don’t maintain your repayments to the credit card company. But if you’re choosing to pay your insurance monthly using a credit card, there are two ways it could drag your credit score down:

A. If you don’t maintain your payments to the insurance company, meaning you’re in arrears for the account.

B. If you miss repayments on the credit card you’re using to pay for your insurance.

On the bright side, consistently meeting your payment obligations to the insurer and/or to the credit card company will reflect positively on your credit history because it highlights your reliability as a borrower. So, if you’re looking to maintain or improve your credit score, you might consider paying in instalments. Making on time, consistent payments should help boost your credit score.

Good credit score vs low credit score: the car insurance perspective

Understanding how your credit score can influence your insurance rates and terms is key to making informed decisions about your coverage. 

Here’s a closer look at how your credit score influences insurance quotes:

Benefits of a good credit score for car insurance

Having a good credit score can be a major advantage when it comes to getting car insurance. Insurers evaluate risk when determining premiums, and a strong credit history signals low-risk. This is based on statistical correlations suggesting individuals who manage their finances responsibly tend to be more responsible in other areas, including driving. 

So having a good credit score means you might benefit from:

• Lower insurance premiums. Insurers may offer lower rates (i.e. better deals) to individuals with good credit scores. This can translate into valuable savings on your car insurance policy.

• Better coverage options. A good credit score might give you access to a broader range of car insurance products and coverage levels, allowing you to tailor your policy more closely to your needs.

• More favourable terms. Insurers may also be more willing to offer flexible payment options and other favourable terms, making it easier to manage your insurance alongside other financial commitments.

How might a lower credit score affect my car insurance?

A lower credit score can lead to you being offered less favourable car insurance options and higher premiums. This is because lower scores indicate financial risk for the insurer. 

But it’s important to keep in mind that your credit score is one of several factors (we’ll discuss the others in the next section) that insurers consider when setting your car insurance premiums. So, while a lower credit score can influence the terms and quotes you’re offered, it doesn’t solely determine them. 

Some ways that a lower score may influence your car insurance include:

• Higher insurance premiums. To compensate for the perceived higher risk, insurers may charge higher rates for the same coverage, which can increase your car insurance costs.

• Limited coverage options. With a lower credit score, some insurance products or levels of coverage can be more difficult to obtain.

• Less favourable terms. Insurers may offer you less favourable terms – for example, they might ask for larger deposits, or not offer you monthly payment plans.  

Understanding the relationship between your credit score and car insurance helps you manage both. By maintaining a good credit score, you may be able to enjoy lower premiums and better terms, while a lower credit score may lead to higher costs and more restrictions.  

Beyond credit scores: how insurers tend to price quotes

Insurers don't rely solely on credit scores to set your car insurance premiums. Instead, they consider several factors, including (but not limited to):

• Driving history: Your past driving record, including any accidents or traffic violations, strongly indicates your risk level.

• Vehicle type: Your car's make, model, and safety features can significantly impact your rates.

• Location: Where you live and where you park your vehicle can affect your risk of theft or damage, influencing your premiums.

• Age and experience: Younger, less experienced drivers often face higher rates due to a potential higher risk of accidents.

So, while your credit score may affect your car insurance quote, it’s far from being the only factor involved. 

Final takeaways: car insurance and credit scores

These are the key things to remember when it comes to car insurance and credit scores:

• Soft credit checks shouldn’t influence credit scores. The terms you get offered by car insurance firms may be influenced by what appears in their soft check (soft search) on your credit file, but this check won’t impact your credit score. 

• Car insurers won’t normally do a hard credit check. A hard check (hard search) will usually only occur if you apply to pay for your car insurance in monthly instalments, and thereafter, maintaining those payments is essential to keeping your credit score healthy moving forward.

• Paying with a credit card can affect your credit score. Whether you use your credit card for a one-off lump sum payment to cover your car insurance, or if you use it to pay for your monthly instalments, it’s important to keep making your monthly repayments on time. 

See where you stand with the most detailed credit report out there. Start your 30-day free trial with Checkmyfile today. A monthly subscription price applies after. Cancel online anytime.  

Related FAQs:

1. Can insurers reject me due to a low credit score?

While it's theoretically possible, rejection based on bad credit is uncommon in the car insurance industry. More often, your credit score might influence the cost of your premiums rather than affect your ability to obtain insurance. But it could mean that the insurance company doesn’t offer you a monthly payment plan – so you’ll need to pay your car insurance in one lump sum. 

2. Does adding named drivers to my policy require credit checks?

Generally, credit checks aren’t conducted for named drivers added to your car insurance policy. The main policy holder is the one who enters into the contractual agreement with the insurer and is responsible for making the premium payments. Insurers focus on the credit history of the main policyholder.