Does your credit score affect car insurance?

Find out why your score can affect your car insurance premium, and what to do to improve it.

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Insurance companies don’t have a blanket approach to how they calculate your premium, which is why it’s worth comparing quotes from different providers. But generally, if you have a poor credit rating, you’re likely to pay more for your car insurance than someone with a better rating. This is news to many people – why should credit have anything to do with insurance? Good question. We explain it all here.

Insurance instalments are credit

When you get a quote for car insurance, you’re usually offered the choice of paying for a year’s worth of cover in one lump upfront or paying a deposit and then spreading out the rest via monthly payments (10 or 11 usually), which is typically more expensive (in some cases, hundreds of pounds extra).

At the quoting stage, an insurer will usually do a “soft” credit check on the details you’ve given about yourself, to ensure they’re true. This type of credit check won’t be visible to lenders if, say, you later apply for a loan or a mortgage and they look at your file.

If you decide to go for monthly payments, you’re effectively getting credit from the insurer. And before it gives you that credit, it will also do a “hard” credit check – as any lender would do – to assess whether you can make the payments. This type of check will be visible to other lenders if they look at your credit history, but the insurer should tell you before it does this type of check and it should happen only if you go through with buying the policy.

The Association of British Insurers (ABI) told Finder: “Most insurers will perform a credit check on you if you choose to pay monthly. Depending on the insurance provider, the information they receive might be used to set the APR for your payments, in addition to other factors.”

The APR is the interest rate and any extra charges you pay for spreading out the payments. It generally reflects the risk that a borrower presents – typically the higher the risk, the higher the rate. Some insurers might even refuse to let someone pay monthly if they have a poor credit rating.

It’s common for insurers to charge more if you pay monthly, and if you pay a lot for your insurance, paying monthly could be hundreds extra.

Credit history and insurance claims

Insurers use lots of factors when they (or their algorithms) calculate a premium for your cover. This includes your age, your driving experience, where you live, your occupation and your history of insurance claims. These all feed into an insurer’s view of whether you’re likely to make a claim, and so what it’ll charge you for cover.

In the UK, it’s not considered common practice for insurers to factor your credit history into your likelihood of making a claim. But some reports suggest that those who have a poor credit history are statistically more likely to claim, and that insurers might regard people who have, say, missed loan payments as being prone to more risky behaviour.

One study by the credit score specialist ClearScore analysed more than 9,000 quotes and credit scores and reported a link between elements contributing to credit scores and the premium customers were offered. Users with a higher credit score typically received lower premiums.

What is an insurance credit score?

This is a term from the US, where most insurers check a credit-based insurance score – not a traditional credit score – when someone applies for cover, and they use it to set premiums. Drivers with poor credit may pay as much as 42% more for car insurance than drivers with stronger credit. So far, we haven’t encountered this in the UK.

How to pay less for monthly car insurance

If you can’t afford to pay for a whole year’s car insurance upfront and are considering the monthly option that comes with an extra charge for interest, consider taking out a 0% credit card and putting the annual payment on that instead – just make sure you pay off the whole cost during the interest-free period.

If your credit history isn’t great, our guide to getting cheap insurance when you have bad credit can give you tips and help you find the right deal.

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*Based on data provided by Consumer Intelligence Ltd, (July ’22). 51% of car insurance customers could save £388.64

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