It’s common knowledge that neglecting to make payments on time (or at all) can be detrimental to your credit score. But what about car insurance? New drivers might ask themselves, “Does not paying my car insurance affect my credit?”
The answer to this is yes and no. A credit score is not impacted simply because your car insurance bill was not paid. However, the subsequent debt collection reports are what end up affecting your credit score.
Let’s look at how credit and auto insurance are connected and what to do if you struggle with auto insurance payments.
What Your Credit Report Consists Of
Your car insurance policy doesn’t appear on your credit report because auto insurance companies don’t report your payments to credit bureaus.
However, your insurer could send an unpaid balance to a debt collection agency if you neglect to pay your bill. Then the debt collector will most likely report that to the credit bureaus.
Your credit report will likely consist of the following:
- Identifying information: Your name, Social Security number, address, and date of birth. This basic information doesn’t affect your credit score.
- Credit information: This is provided by your lenders and creditors. It includes information on how long your accounts have been open, the loan amounts and credit limits, your account balance, and your payment history.
- Bankruptcies: It includes information on when you declared bankruptcy and the type of bankruptcy you declared.
- Collections accounts: This includes any past-due accounts you’ve had that were sent to collections agencies. It can also include other accounts, such as ones with a doctor or hospital, as well as cable and cellphone providers.
- Inquiry information: The two types of inquiries are “soft” and “hard.”
Soft inquiries are typically from when you check your credit reports. They don’t impact your credit score. If you regularly check your credit score, you can know if there are things negatively affecting your score.
Hard inquiries are made by companies or other individuals that may need to check your credit report after you apply for a service (such as a new loan or credit card).
You should always check your credit score before purchasing something important, like a car or house. This way, you know what creditors and lenders are seeing when they check out your report.
Understanding Credit-Based Insurance Scores
While failing to pay your car insurance bills does not immediately impact your credit score, your credit score can impact what policies you are eligible for. It’s important to keep in mind that many other factors are used to determine someone’s insurance rates.
Various studies have found that people with lower credit scores are more likely to make claims on their insurance. This makes them a risk to insurance companies. Therefore, having a lower credit score means that you could end up paying more for your insurance.
This is just one way that a low credit score can impact someone’s finances.
In some states, the use of credit-based insurance scores is limited or not allowed at all. These states include California, Hawaii, Maryland, Michigan, and Massachusetts.
The state of Washington has also prohibited insurance providers from using credit scores to determine an insurance premium through the year 2024.
According to FICO, roughly 95% of car insurance providers use credit-based insurance scores in the states where it is legal to practice it.
However, it’s not the sole determining factor, and insurance providers are not allowed to deny, cancel, or refuse to renew insurance based on a poor credit score.
How Failure to Make Insurance Payments Affects Your Credit
While your credit score is not immediately impacted by a late or completely unpaid insurance payment, your insurance provider may end up increasing your rates.
Some companies don’t have a grace period for late payments. If this is the case, your insurance provider will cancel your coverage once the payment is considered to be late.
This is not good for multiple reasons, including the fact that it will be more difficult to repurchase insurance coverage in the future.
Your company will likely end up reporting your late or nonpayment to a collections agency. Once there is a debt collector involved, your credit score will start to decrease. It also stays on your credit report for up to 10 years.
However, the rest of your financial situation will determine how greatly this impacts your credit score.
Coverage Cancellation Due to Nonpayment
Obviously, you will have a lapse in coverage if your provider cancels your policy due to late or no payment. Driving without insurance at all is extremely risky since you could receive misdemeanor charges.
If you’re found to be driving without insurance multiple times, your driving privileges can be taken away.
In many states, a person caught driving without insurance will have their vehicle registration suspended. Driving an unregistered vehicle can also have huge consequences.
Making a Payment Extension
If you think that you can’t pay your insurance premium on time, ask your provider for a payment extension. You shouldn’t ask for a payment extension too often, but it can help when you’re in a rough financial spot.
A payment extension won’t show up on your credit score. Only an extension on payments like loans will impact your score.
However, you will likely see a late fee applied to your next payment. Your next payment will still be due on your normal due date. The exact amount that the late fee will cost depends on your insurance provider. Typically, though, it can range anywhere from $15 to $50.
In some cases, an insurance provider will base the cost of the late fee on how many days your payment is delayed. Unsurprisingly, a fee like this can add up quickly.
If you regularly struggle to make insurance payments, you may want to shop around for a lower premium cost. Sometimes people have more coverage than is necessary, making their policy needlessly expensive.
Increasing Your Credit
If the involvement of a debt collector has lowered your credit score, you aren’t totally doomed. If car insurance payment issues have lowered your credit score, the best thing you can do is ensure you have the funds to keep up with regular payments.
This way, you won’t have to risk the involvement of a debt collector again.
Plus, you could get a lower premium or loyalty discount from your insurance provider if you consistently make payments on time.
Luke Williams writes and researches for the auto insurance comparison site, AutoInsurance.org. His passions include best practices for managing insurance and building good credit.