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UPDATED: Mar 13, 2020
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Building your credit takes time. In fact, you’re not born with credit because you have to prove that you’re a financially responsible and creditworthy when you’re old enough to enter into credit contracts.
As you apply for credit cards, take out loans, and make your payments on time, you’ll be viewed as a responsible customer and borrower.
It’d be nice if all of the bills that you pay each and every month could be used to help build your credit, but that’s not the case.
It’s generally the bills that you put on the back-burner after the ones that are a priority that are reported. It’s frustrating to learn that some of the largest expenses that you pay every month don’t have an impact on your credit. Here’s what you need to know about insurance and credit:
What is the purpose of a credit file?
Anyone who wants to buy a home, buy a car, get a credit card, or get hired by a major corporation will need to have an established credit history.
Some people with no credit can find car loans and credit cards but they’ll be restricted in where they can do business, how much they can finance, and how much they can afford with their high-interest rate.
Experian, Transunion, and Equifax are the three credit bureaus that creditors report payment and financial account information to. On-time payments, account histories, late payments, account balances, and credit limits, and defaults are all reported in your credit file with each bureau.
The information in your file will then be used by several different entities like employers, creditors, and lenders to determine if you’re creditworthy.
Is your car insurance account reported on your credit file?
A lot of different types of accounts are reported in your file. In the past, the accounts that could help you build credit were very limited.
Now, many rental companies report housing rents and utilities to your file. Unfortunately, the premium payments that you make to your insurer aren’t reported to the bureaus and won’t help you build credit.
Why isn’t car insurance reported to your credit?
The main reason that car insurance payments aren’t reported to credit reports is because you don’t establish a credit relationship when you open a policy. Since your payments are made before the services afforded by your auto policy are rendered, no debt is established by entering into the insuring agreement.
Instead of penalizing you by inputting negative data in your report after a late payment, the insurer will just terminate your coverage. If you have a lapse, the insurer is free to deny any claims that you make after the date of the termination.
Credit is Used to Calculate Your Rates
Just because your payments aren’t reported to your credit file doesn’t mean there’s not a correlation between credit score and auto insurance premiums.
All of those on-time payments that you’ve been making just to keep your insurance active may not be helping build your credit but if you miss payments with a creditor it could raise your rates.
Insurance companies in many states are allowed to use specific information reported in your credit file to predict whether or not you’ll file a car insurance claim sometime in the near future.
While the data in your credit report doesn’t contain information that’s specific to your car or driving history, experts feel that your ability to pay bills can affect your ability to pay for your damages after an accident.
Failing to Make Your Payments Can Have an Indirect Effect On Your Credit
Paying your premiums on time isn’t going to help you on your path to tier one credit, but if you fail to make your payment there’s a good chance that you could ruin your credit.
Not because the company will report a late pay or a default on your credit, but because of all of the disasters that can happen when you allow your insurance to lapse.
Uninsured Accidents and How They Affect Credit
If you put off paying your premiums and your coverage lapses, your insurer will not pay for first-party or third-party claims that you make after an accident. If you have an uninsured loss, it could land you in court defending yourself. If the judge awards damages to the other party, your wages could be garnished.
Wage garnishments can be reported on credit, but that’s not the only effect to consider.
If a percentage of your income is taken to pay for a settlement, you have less money to work with when you’re paying your bills. This means that some of your bills will have to be late to make ends meet until your obligation is paid off.
Forced-placed Insurance Can Raise Your Car Note Payments
When you don’t maintain full coverage on a financed vehicle, the lender is free to put forced placed insurance on the vehicle just to pay off the loan after it’s totaled.
The insurance isn’t free and the cost will be added to your loan. Unfortunately, if you can’t afford to pay premiums, you probably can’t afford to pay a higher car note payment.
How Can You Be Resourceful and Build Your Credit
If your mission is to build your credit by paying most of your bills on time, one of your options is to get a secured credit card. You can deposit money with the provider, get your card, pay your insurance premiums on the card, and then pay off the balance of the card to establish a good payment history.
It can be disappointing to hear that being a loyal and responsible car insurance consumer doesn’t automatically help you with creditworthiness. Make sure you compare auto insurance premiums online to see if you’re getting a good deal. Then, pay your premiums with your credit card and pay down the balance.