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Credit Score and Car Insurance: Does Credit Score Affect Car Insurance?

Team AckoMay 18, 2021

A credit score is a common term that you often read/hear when availing of any financial services. Be it while borrowing a loan, applying for a credit card, buying car insurance, credit score matters. You may be wondering how credit score affects car insurance? Read ahead to find out the answer!

Before diving deep into the financial terms associated with credit score, let's determine how credit score and car insurance co-relate with each other. In simple words, credit score determines the risk factor associated with the customer, and it also determines the insurance premium. However, the extent of the significance of credit score in auto insurance is still unknown.

What is a Credit Score?

A credit score is a numerical representation of the creditworthiness of an individual. In other words, it is an indicator of a person’s ability to repay debts/bills. Also called a credit rating, the financial history of an individual determines it. The following factors determine the credit score.

  • Current debts/loans

  • History of repayment of debts/loans/bills

  • Currently available credit

A credit rating is a numerical score that ranges between 300 to 900. A person with a high credit score will find it easier to get loan approvals and credit cards. Credit rating is also called CIBIL credit score as Credit Information Bureau (India) Limited (CIBIL) is responsible for calculating an individual’s credit score. Financial institutions provide the information about your financial transactions to the bureau, and CIBIL comes up with the credit rating based on your credit history. You can find your credit score in India online via the CIBIL website.

How Does Credit Score Affect Car Insurance?

A credit score determines the financial risk you may pose to a financial institution/company or an insurance provider. So, credit rating is one of the crucial factors that decide the rate of insurance or insurance premium. In specific ways, car insurance is also a kind of line of credit, and your credit score paints a picture of how well you manage your credit lines.

Credit score also determines your capability to pay car insurance policy premium. The higher your credit rating, the higher the chances of saving on the motor insurance premium. When you apply for car insurance, the insurer may check your credit score to compute the premium. So, the one way to reduce the car insurance premium is by improving your credit rating. You can also reduce the insurance premium by buying car insurance online from a digital-first insurer such as ACKO.

How Can Credit Score Lower Your Car Insurance Premium?

A high credit score will help you in earning a high insurance score. The insurance score is determined by taking into account the credit history of an individual. So, with a good credit rating, you can avail of car insurance plans at lower premiums.

If your credit score is low, you may end up paying a higher premium for motor insurance. You may not be eligible for higher insurance covers if you have a poor credit score.

Credit Score Calculation

The credit score calculation considers several factors such as accounts held by an individual and negative records such as late payment penalties, pending dues, etc. Refer to the below table for a better understanding of the calculation of credit rating.

Credit Score (In Percentage) Parameter Details
10 New Line of Credit Information about your new accounts and comparison of new borrowing accounts with the previous accounts. It also considers factors such as the number of enquiries made by you and problems in repayment of loans. 
10 Verification of Accounts and Current Mortgage Revolving credits and loans paid in EMIs are taken into account.
15 Credit History Timeline Financial institutions track your activities since you borrowed the loan. The longer the credit history, the better the credit score.
30 Current Debts Verifies the amount of money you have to repay to the lenders and the repayment method and consistency of payments. Zero balance accounts will also favour your credit score.
35 Repayment History Checks for accounts you are paying loans and any negative records of the repayment. It also considers factors such as failure of payment within the due date.

If you notice, the repayment history accounts for a significant part of your credit score. That means, if you pay your debts/loans or bills on time, you will have a higher credit score.

How to Check Credit Score?

You can check your credit score online for free, and it takes only a few minutes. To check your credit score online, log on to any of the websites that offer free credit score checks. Enter your details (Name, mobile number, etc.), and the tool will calculate your credit ratings within a few seconds. 

While most of the websites offer free credit score check, you can also opt for paid credit rating calculation tools. The paid tools provide premium service, and you can get exhaustive information about your credit score and tips to improve your credit rating.

What is a Good Credit Score?

A credit score ranges between 300 to 900. Typically, a credit score of 750 and above is considered a good credit rating. The higher your credit score, the more the chances of getting a loan approval or a credit card.

Tips to Improve Your Credit Score

Here are some tips to improve your credit score.

  • Pay loan EMIs and credit card bills on time

  • Avoid opening multiple accounts in short periods

  • Avoid multiple credit card and loan applications in short periods

  • Reduce the number of loans

  • Use credit cards within manageable limits

  • Maintain your credit utilization ratio (CUR) within 30 percent

Credit-based Insurance Score

A credit score is a triple-digit number in the range of 300 to 900, and it determines the risk factor you pose as a borrower. Financial institutions consider your credit rating while lending you loans, credit lines, etc. Similarly, insurance companies also consider credit-based insurance scores during the insurance premium calculation. The credit-based insurance score is also determined based on your financial history. However, an insurer does not account for factors such as job history, income, etc.

Credit Scores vs Credit-based Insurance Scores

Refer to the following table for key differences between credit score and credit-based insurance score.

Credit Score Credit-based Insurance Score
Used by financial/lending institutions. Used by insurance companies.
Determines interest rates and loan qualifications. Determines the insurance premium.
Calculated using factors such as loan/EMI repayment history, credit utilization, credit duration, etc. Calculated by considering your financial history, but does not account for personal information such as job, income history, etc.
Determines the likelihood of loan/debt or credit card bill repayment. Determines the likelihood of insurance claims.

Factors Affecting Car Insurance Rates

Your credit score is only one of the several factors that impact the car insurance premium. Below are some of the significant factors that affect the auto insurance premium.

  • Make/model of the vehicle

  • The geographical location where the car is registered

  • The engine capacity of the car

  • Safety features/equipment of the vehicle

  • Usage of the vehicle

  • Claim history

  • Any additional discounts (NCB)

Also, read: 10 Factors Which Determine Car Insurance Premium?

Conclusion

As an individual, you are under the impression that the credit score is only required to get easy loan approvals and credit cards. But, there is a bigger picture of how credit score impacts car insurance. It could take some time to improve your credit rating, but the benefit it offers is worth the effort. 

Your credit score can save you money while purchasing motor insurance and help you get better coverage for your car. It is crucial to keep your financial records clean as it impacts your credit rating. If you are not aware of your credit score, it's time to check your credit rating and improve it by following the tips mentioned in this article.

Frequently Asked Questions

Here are some of the most frequently asked questions related to credit score and car insurance.

FAQs

Do I need a good credit score to buy car insurance?

No, a good credit score is not compulsory to purchase motor insurance. But a good credit rating may sometimes lower the car insurance premium.

Why do insurance companies use my credit score?

Insurance providers use your credit score to determine your risk factor as a customer. The credit rating helps the insurers to assess the likelihood of payment of premiums.

Does paying credit card bills on time improve my credit score?

Yes, your credit score will improve if you clear your credit card bills on time or within the due date.

Does paying for car insurance improve my credit rating?

No, paying a car insurance premium will not help in improving your credit scores. But if you pay the premium via your credit card and then pay the credit card bills on time, your credit score will improve.

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