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Does Paying For Car Insurance Build Credit? | If So, How Does it Work?

There are a lot of people who believe that paying for car insurance builds credit. Unfortunately, this is not true. Paying your car insurance bill on time and in full is a good habit to get into, but it’s not going to directly help build your credit.

Let's discuss how this works to get the facts straight about building credit with insurance as advised by a consumer finance expert.

Key Takeaways

  • Paying for car insurance does not build credit unless you are paying with a credit card.
  • Failure to pay for insurance can result in paying higher auto insurance premiums in the future.
  • A lower credit score may result in higher premiums in states where insurance firms are permitted to use credit scores for establishing rates.
  • When a policyholder uses a credit card to pay for insurance and makes on-time payments, they will be building or improving their credit.
  • Late payments with a credit card for car insurance can also be reported to credit bureaus, which can negatively affect credit scores.

What is a Credit Score?

A credit score is a number that rates your creditworthiness. It's used to determine whether or not you'll be approved for a loan, credit card, or other types of credit, and how much you'll pay for it.

A credit score is a number between 300 and 850. The higher your credit score, the better your chances of getting approved for loans and other credit products. A good FICO score ranges from 750-850 while a bad credit score falls below 600.

A good credit score

Does Paying Car Insurance Build Your Credit History?

The answer is no. Paying for car insurance does not directly build credit. When you pay for car insurance, auto insurance companies are not giving you credit. Instead, they are providing you with coverage for your vehicle in the event of an accident or other covered incident.

If you make late or fail to make car insurance payments, most insurance companies will simply cancel your policy or charge you an additional fee.

Some Auto Insurance Companies Send Unpaid Balances to a Collection Agency

However, certain auto insurance providers might contact a collection agency if you have an outstanding debt. This could have a negative effect on your credit score because the collection agency might report your account to the credit agencies.

If you have an unpaid balance on your auto insurance policy, contact your provider and make arrangements to pay off any outstanding debt as soon as possible.

Making Car Insurance Payments with Credit Card

If you use a credit card to pay for your auto insurance on time, you will be building your credit.

On the other hand, if you make late payments on your insurance car payments, they may be reported to credit bureaus and hurt your credit scores. So, it's important to keep an eye on the due date of your car insurance payment and also check the credit reports regularly to make sure that there are no mistakes or unfavorable records.

The Effect of NOT Paying Your Car Insurance

Auto Insurance Policy Will Be Canceled

Not paying your car insurance can have serious consequences. One immediate effect is that your coverage will be suspended, leaving you at risk of financial loss in the event of an accident or other covered incident.

Without insurance, you may be held personally liable for damages or injuries caused by you or your vehicle, which can be financially devastating.

Car Insurance Premiums Will Increase

It's important to remember that skipping to make car insurance payments can cause your future insurance prices to increase.

Insurance companies consider your payment history when determining your rates, and if you have a history of not paying your premiums on time, it may be seen as high-risk behavior. This could result in higher rates for you, making it even more difficult to afford insurance in the future.

Car Repossessed

It's worth noting that depending on the laws of your state, the state may take the car plates or impound the vehicle if you are found to not have insurance.

 Also, some car loan providers may require the borrower to have active insurance on the car, and non-compliance may result in your car being repossessed.

Insurance coverage document with car keys on it

Credit’s Impact On Car Insurance

In some places, insurance providers are permitted to check your credit report to calculate your car insurance premiums. This means if your credit score is low, you may be required to pay higher premiums. And vice versa is true.

The use of credit scores by car insurance companies is a common practice in many parts of the world. Insurers argue that credit scores are a good indicator of a person's overall financial responsibility and can be used to predict their likelihood of filing a claim.

Why Do Car Insurers Care About My Credit Score?

The reasoning behind this practice is that people with great credit scores are more likely to be financially stable and responsible, and therefore less likely to file claims. They are also more likely to have the means to pay for any damages that may occur in an accident.

On the other hand, people with poor credit scores may be more likely to file claims, and may also lack the financial resources to pay for damages.

Therefore, those with good credit scores are often offered lower premiums, while those with poor credit scores may be required to pay higher premiums.

Cartooned document about car insurance

States not Permitted to use Credit Scores

It's important to note that the use of credit scores for car insurance purposes is not universally accepted.

Some states in the US, such as California, Hawaii, and Massachusetts, have banned the use of credit scores by car insurance companies. In these states, insurers must use other criteria, such as a person's driving record, to determine their premiums.

Additionally, even in states where credit scores are used, there are protections in place to ensure that credit scores are not the only factor considered.

 This way, a person with a low credit score, but a good driving record is not unfairly penalized with high premiums.

Car insurance cartooned with men shaking hands

What Does Affect My Credit Score?

Your credit score is a numerical representation of your creditworthiness, which is determined by a number of factors. The most important factors that affect your credit score include your payment history, credit utilization ratio, credit history length, and the types of credit you have.

Payment History

Payment history is the most significant factor in determining your credit score. Late or missed payments can have a negative impact on your score, while a history of timely payments can boost your score.

Credit Utilization

Credit utilization, or the amount of credit you're using compared to the amount of credit available to you, is also an important factor. Generally, it's best to keep your credit utilization below 30%.

Length of Credit History

The length of your credit history is another factor that affects your score. A longer credit history demonstrates responsibility and reliability, so having a long credit history can benefit your score. Additionally, having a mix of different types of credit, such as a credit card and a loan, can also have a positive impact on your score.

It's also important to note that errors on your credit report can also affect your credit score. This is why it's important to regularly check your credit report for errors and to correct any inaccuracies.

Car insurance document

Wrapping UP

Overall, paying for car insurance does not directly build credit. However, making timely payments on your car insurance premiums with a credit card can have a direct positive impact on your credit.

There are other ways that you can build credit, such as making payments on time for credit cards, loans, and other bills. It's also important to make sure you have a low credit utilization ratio and a mix of credit types.

About Dusan Stanar

I'm the founder of VSS Monitoring. I have been both writing and working in technology in a number of roles for dozens of years and wanted to bring my experience online to make it publicly available. Visit https://www.vssmonitoring.com/about-us/ to read more about myself and the rest of the team.

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