Car Insurance Rates: How Credit Score Affects It?

Purchasing car insurance is financially sound; moreover, third-party insurance is mandatory per the law. But did you know that your credit score affects its premiums? If not, read on to understand the relationship between credit scores and car insurance premiums. You will also learn about improving your credit score to reduce your car insurance premium.

What is a credit score?

A credit score is a system to track your creditworthiness or how likely you are to default on your loans. This score, between 300-900, also tells lenders how responsible you are in financial matters. 

The factors affecting a credit score include:

• Timely Payments: You must pay your credit card bills on time. Defaulting on credit card payments reduces your credit score.
• Credit Utilisation: The credit used per total available credit is also essential. According to experts, using only up to 30% of the limit would be better for your credit score. 
• Credit Type: Your credit score also considers whether you can handle unsecured and secured loans. In secured loans, you provide an asset to the bank as a guarantee, which you don't have to do for getting an unsecured loan. However, unsecured loans need higher credit scores. 

How to know a credit score?

You can check your credit score via a credit bureau; currently, the following credit bureaus operate in India:

• TransUnion CIBIL
• Experian
• Equifax
• CRIF High Mark

These companies compile and maintain an individual's credit information, including loans and credit card debt. To check your credit score, visit the company's website. You must enter your name, date of birth, and PAN card; your phone number will receive an OTP. After entering the OTP, you can see your report. 

Why does the credit score affect the insurance rates?

You read that your credit score illustrates your financial responsibility. That means the higher your credit score, the more responsible you are. Lenders love responsible people; they are more careful and less likely to cause accidents. Studies also support this claim; there is a correlation between people with high credit scores and those with fewer insurance claims. 

Therefore, lenders believe that anyone with a high credit score is less likely to make an insurance claim. And to attract those people, insurance companies offer lower premiums to them. 

Read on to know what your credit score exactly means:

• 750-900: You have consistently paid your loans and will have no problem getting your loans approved.
• 700-750: Some banks will research further, even if you have not defaulted on your credits.
• 550-750: You have defaulted on your past credits, making you ineligible for some banks. Banks willing to give you loans will charge a high interest rate.
• 300-550: People with a credit score in this range will have significant difficulty getting loans. This range shows that you have several defaults and write-offs on your loans. 

How do you minimise your car insurance premiums?

Consider the following points If you want to minimise your car insurance premiums by improving your credit score. 

• Don't apply for loans frequently. Applying for loans often shows that you have less financial stability, making it risky for companies to lend your money.
• Repay loans on time. Not repaying loans on time also shows your financial instability; having pending loans also increases the chance that you will default. 
• Have multiple credit cards. More than one card helps lower your credit utilisation. You don't have to charge all your expenses to a single credit card; this way, you can avoid completely exhausting your credit limit. 
• Check credit reports. This practice may not improve your credit score; however, it will prevent any harm to your credit score due to unauthorised use. You should immediately report any suspicious entry in your credit report. 

In conclusion, car insurance premiums depend upon your credit score. Your premiums will be low if you have a higher credit score and vice-versa; timely credit payments are the primary factor affecting the credit score. Therefore, if you want low premiums, ensure you get loans for the amount that you can pay on time. Other ways to improve the score to lower car insurance premiums include multiple credit cards, less frequent loan applications, and frequent credit checks for wrong reports. 

FAQs

• Is car insurance necessary?

Third-party car insurance is necessary; this policy protects the third party involved in the accident, where the first party is the owner and the second party is the other members of the car. However, the car damage is not necessary. You can buy this coverage separately or as a part of a comprehensive plan. 

• What do you mean by a car insurance premium?

Car insurance premiums are the periodic payments you make to the insurance company. This amount depends on the sum insured, your driving history, credit history, car specifics, location, etc. The period between two premiums is a policy term, and this term also changes the premiums you must pay. For example, premiums for a two-year policy term differ from one year. 

• How does the age of the car affect the policy premium?

The car's age is one of the factors affecting your insurance premium. The reason is that the value of a car depreciates with age, and the insurance premium depends on the car's value. Therefore, most old cars will have low insurance premiums. Only the luxury cars bought by car enthusiasts incur higher premiums. 

• What are add-on covers?

You may not need all types of protection for your cars. For example, protection from water damage is unnecessary if you don't live in a flood-prone area. Therefore, insurance companies provide these special protections as add-ons. You can include individual add-ons to customise your car insurance policy. 

• Does security technologies in the car affect insurance premiums?

Safety features reduce car insurance premiums. Car insurance may cover theft; you will get an amount according to your car's current value when your vehicle gets stolen. And the premiums depend on the risk. That means you can reduce the insurance premiums by lowering the risk by installing safety technologies.