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High credit score equals low insurance premium – Find out why

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Published on September 2, 2021. EST READ TIME: 3 minutes
Car insurance can undoubtedly protect your finances in case of an accident, fire, theft or natural disaster. But like everything else in life, it comes at a price. Whether you buy your car insurance online or offline, your premium is dependent on several factors such as the vehicle itself and your own personal history. Your history includes past accidents, claims, traffic violations, and your credit score. To find out how credit score can impact your premium, read on.

What is credit score?

Your credit score is a three-digit number that is representative of your creditworthiness. In simple terms, it reflects your ability to pay back loans. It accounts for all your borrowings and repayment history, your credit utilisation, duration of credit, and your credit mix (loans, credit cards, and insurance). This score is used by lenders and insurance companies to understand the risk they’re taking when dealing with their existing and potential customers.

A low score is considered ‘risky’ and attracts a higher interest rate or premium. On the other hand, a high credit score tells lenders and insurers that you’re responsible and reliable in paying your loan instalment or your insurance premium in a timely fashion. There are four companies that provide credit information usually – CIBIL, Equifax, Experian, and High Mark. Each company has their own scale but are guided by the same fundamental principles.

Why does a poor credit score negatively affect car insurance?

To understand this, let’s see how one can end up with a poor credit score. For starters, missing out on your credit card bill payment affects your score negatively. Not just credit card, but also your insurance premium, and loans. Your repayment history contributes about 35% to your credit score. So, missing out on debt repayment is significantly responsible for the lowering of your credit score.

Secondly, using a high percentage of the credit that is offered to you also lowers your score. It tells the lender that you do not have adequate disposable income for your purchases and therefore, are risky. Using only up to 30% of the credit available to you is a good way to lower your risk profile. Using credit above this threshold tells lenders once again that you do not have enough disposable income for your needs.

If you have debt for a considerable amount of time, it is viewed negatively by insurance companies as it shows a lack of funds at your end. What it tells car insurers is that in case of minor accidents, you will most likely file a claim because you do not have disposable income for a significant span of time. Because your likelihood of claim-filing increases, insurers are inclined to charge a higher premium so that their losses are covered.

How can you improve your credit score?

Apart from taking measures to resolve the issues mentioned above, you can start by reviewing your credit report.

• Credit information companies usually provide a free report once a year. Check your report for inconsistencies or errors and have them removed.
• Repay your debt – Lower your debt utilisation and start repaying your debt on time, and with the required amount.
• Avoid having a credit card that you do not use. Cancel dormant credit cards and use only one, if you must.
• Space out your loan applications and make prepayments if possible.
• If you have no credit history, it is advisable to take a credit card and make timely payments so that favourable data is generated. Take insurance as well and make timely premium payments to build a healthy credit score.

So, before buying car insurance online or offline, remember that insurers take on a certain risk when they sell you a policy. Some customers are more likely to file claims than others. There is a correlation between a poor credit score, low disposable income and likeliness of filing a claim. When a claim is filed, for the insurer, it is an expense that will affect its overall financial health. Therefore, they are more likely to offer favourable terms such as a low premium to customers who display creditworthiness or those who have a high credit score.

All in all, check your report to find out your credit score and make changes to your debt repayment strategies if needed, to enjoy better premiums on your car insurance.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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