Does car insurance affect credit score?
4 minute read Published on Aug 12, 2024 by BrokerLink Communications
Whether or not credit scores influence insurance premiums is a long-standing debate amongst Canadian drivers. The short answer is yes: your credit score will impact your car insurance rates, and vice versa. For more information about how your credit history can affect your car insurance payments, stick around.
What is a credit score?
Credit scores are three-digit numbers that indicate how likely an individual is to pay their bills. High credit scores indicate that a person has paid or is paying off their outstanding debt at a favourable rate and is making on-time payments.
In contrast, lower credit scores suggest that the individual has a history of being unable to make on-time payments, which can negatively impact different aspects of their lives, including what they pay for insurance coverage.
Three of the main credit bureaus in Canada are TransUnion, Experian, and Equifax. They tend to use information like payment history, accumulated debt, and length of credit history when calculating your score.
Does credit impact insurance rates?
Yes, your auto insurance is affected by your credit score. Many car insurance companies use a credit-based insurance score, which will essentially help an insurance provider determine the risk level associated with each policyholder. Generally, those with a low credit score are more likely to be viewed as a higher risk and file an insurance claim than those with excellent credit.
Why do insurance companies check credit scores?
The reason why an insurance company will use your credit information to calculate premiums is because it helps them determine your risk level. In other words, your credit health is a reflection of how likely you are to file insurance claims, which costs car insurance companies money. It also indicates to them how likely you are to make late payments or not pay at all for your car insurance.
What boosts your credit score?
So, now that you know that your insurance company can use your credit score and credit history to determine your insurance rates, how can you improve low credit scores? Here are some things to consider:
Pay off your monthly bills
Consistently paying accumulated monthly bills by the due date is one of the most important factors in maintaining a good credit score and showing that you're a responsible borrower.
Maintain a long-established credit history
Another way to improve your credit score is to avoid closing old credit accounts.
Refrain from opening up new credit cards
Avoid opening multiple new credit cards in a short timeframe.
Keep an eye on your credit score
Monitor your credit reports and contact the credit bureaus if you notice anything amiss so that your payment history and credit score can remain intact.
Settle your collections debt
If by chance your debt has gone to a collections agency, make settling these amounts a priority as any unpaid collections can significantly affect your credit score.
Make full payments
If you can, try and pay off your credit card balances in full each month. If you are unable to do this, attempt to keep your available credit as high as possible.
Understanding the elements that influence a credit score
In Canada, the five primary factors that affect your credit score include:
Your payment history
One of the major factors influencing your credit scores is your ability to consistently pay your credit on time. Paying your credit or loans off quickly and consistently can help you increase your credit scores.
The amount of debt you have
Your credit utilization ratio measures your current credit card balances to your credit limits. A higher credit utilization can negatively affect your credit scores because it means you're relying on your credit more than you should be.
Your credit history
A longer credit history can affect your credit score as it provides credit scoring models with more information about your financial behaviours compared to a short credit history.
Whether you've applied for new credit inquiries
Each time you open a new line of credit or apply for a loan, credit card or mortgage, your credit report is reviewed. Multiple credit inquiries from credit bureaus in a short period of time will lower your score.
The type of credit you have
Having different types of debt can positively affect your credit scores as it shows credit bureaus you can responsibly handle different credit.
What happens if you don't pay your insurance bill?
If you're behind on paying car insurance, not only will it lower your credit score, but it could also lead to your insurance company cancelling your coverage, which leads to a whole other world of problems.
Does cancelling your car insurance affect your credit history?
No, if you cancel your insurance policy, it will not impact your credit history. Keep in mind however, that if you have outstanding auto insurance payments, it could be sent to a collection agency. This would then impact your credit score.
Factors considered by car insurance companies when calculating premiums
Factors that will influence your car insurance rate include:
- Your driving history
- Credit rating
- Your claims history
- The insurance policy limits you buy
- Where you live
- Make and model of vehicle you drive
- Your age and gender
- Your deductible amounts
- And other factors
Need auto insurance? Contact BrokerLink today!
Are you in the market for car insurance but are worried about your credit score? Don't panic; The experienced insurance brokers from BrokerLink are here to help. BrokerLink has offices across Canada. If we're in your neighbourhood, don't hesitate to visit us throughout the week to work with a broker one-on-one.
Alternatively, if you aren't able to make it into one of our locations, feel free to give us a call anytime, so we can help you shop around for affordable car insurance premiums from some of Canada's top auto insurance companies.