Does paying car insurance build your credit history?

Paying car insurance bills with a credit card

There are a few indirect ways your car insurance bills can impact your credit score, the most straightforward of which involves paying your premium using a credit card. But there are pros and cons to paying your insurance bills this way.

Benefits

Using a credit card provides a safety net that protects against lapses in your insurance policy. And avoiding missing those insurance payments should be a high priority for any car owner.If you love saving money on car insurance using Jerry, you’re going to like this next bit of advice, too: paying for insurance in advance using a credit card can save you even more dough. Most insurance companies offer discounts to customers who pay for their insurance annually or semi-annually (once or twice per year) rather than monthly. Some even have discounts for bi-monthly payments. With a high enough credit limit, you could pay for a year’s worth of insurance upfront and never have to worry about missed payments.

Drawbacks

Having said that, if you’re using your credit card to pay for car insurance, be wary of credit limit utilization. As a general rule, you want to avoid ever using more than 30 percent of your maximum credit, as this can have a negative impact on your credit score. In other words, if your credit card has a $1,000 limit, you should generally try to avoid putting $301 or more on that card at any one time. You may want to take this into consideration when deciding whether you should use your credit to pay your car insurance bills.

Key Takeaway You can use your credit card to pay for car insurance, but there are pros and cons to doing so—especially on a monthly basis.

MORE: Does my credit score impact my car insurance rates?

Credit’s impact on car insurance

That said, your credit score can have an effect on your car insurance rate. According to various studies, people with lower credit scores tend to cost their insurance companies more money. Not surprisingly, insurance companies tend to charge higher rates to people with lower credit scores.

It’s worth noting, though, that your credit score is just one of many factors that insurance companies use when determining your rate. They also look at your driving history, the claims on your history, and other factors when determining your score.

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How will paying your insurance late impact your policy?

You’re not in the clear just because the missed payment isn’t reported on your credit. Your credit may be salvaged, but that doesn’t mean that the insurer will approve of your decision to postpone your payment for a few days or weeks.

If the insurer doesn’t allow late payments, your coverage could be terminated as soon as 1 minute past the due date.

Insurance companies aren’t always required to give you a grace period. If the state doesn’t require companies to give their clients a grace period or advance notice of a cancellation in writing, then you could see your car insurance canceled for non-payment immediately.

The last thing that you want to do is lose your insurance because you were 1 or 2 days late.

Do late payments & payment extensions hurt your credit?

The last thing that you want to do is lose your insurance because you were one or two days late. If you think you’ll be late on an auto insurance premium, ask the auto insurance provider for a payment extension.

A payment extension moves a payment to a later date to help policyholders during a temporary time of financial hardship. Don’t make payment extensions a habit, especially during auto insurance renewal.

According to Experian, a payment extension or deferred payment doesn’t hurt or help a person’s credit, it does appear on your credit record. However, it would only apply financial items such as loans.

What happens if I pay my car insurance late?  Auto insurance providers don’t report late payments or payment extensions for auto insurance premiums. Therefore, payment extensions and even late payments won’t hurt your credit. That doesn’t mean late payments won’t cause other problems.

What about late payments on other bills? How much does one late payment affect credit score? If it’s reported to the credit bureau, even one late payment can cause a drop in your credit score.

Can You Use Your Car Insurance to Help Build Credit?

Even though the insurance company will not directly report to the credit bureau, there are some clever ways that you can use your car insurance and payments to help raise your credit score or maintain a good one, as mentioned in Wallet Hub.

One option is to make your premium payments on a credit card and pay the balance off each month. Your credit card company will then report these on-time payments to the credit bureau, where they will benefit your score. You can also set your credit card as the default payment for payment, which can sometimes give you a discount on your monthly premium.

Can paying car insurance late affect your rates?

If you miss your payment by just a few days, most companies will reinstate your coverage. You only need to make a payment, and the coverage will be activated. Your premiums won’t change, and you won’t have to apply for a new term, which is the easiest option.

When you no longer qualify for coverage, or you’ve let your policy lapse for too long, you’ll have to search for insurance elsewhere.

When you apply, the insurer may check your CLUE report. If the lapse is reported, some insurers will charge you a high-risk premium for failing to keep your coverage active.

Other Ways To Build Credit

Making your car insurance payments on time and in full is important, whatever payment method you choose. 

Remember, you won’t build credit just by making your car insurance payments. But using a credit card to pay those insurance premiums can have an indirect impact. Just remember it’s the responsible use of your credit card that can have a positive effect on your credit score. 

But there are also ways you can build your credit, even without a credit card. Becoming an authorized user on someone else’s credit card account, applying for credit builder loans, and using personal loans responsibly may help improve your credit score. 

Whats the bottom line?

Car insurance is a monthly bill that must be paid on time. However, unlike certain other bills – like a credit card bill – car insurance payments will not build your credit score. Your carrier is charging you in advance for your car insurance policy: you’re not borrowing money from your car insurance carrier. Even if you make monthly payments, this is not considered a form of credit.

However, drivers who fail to make timely payments on their car insurance may have their policies canceled after a 10 or 20-day grace period. Missing payments will not affect your credit score, but the consequences of driving without car insurance could severely impact your credit score.

Why Your Credit Score Affects Your Insurance Premiums

Your credit score is just one of many factors that can affect what you ultimately pay for premiums. As stated by Chase, aside from your credit score, insurance companies will look at:

  • Your driving history
  • Your claims history

While it may seem strange that your credit score is used to determine rates, it has been shown by researchers to be a good predictor of how likely you are to file a claim. When someone has a lower credit score, they tend to have more claims and higher-dollar claims.

There has been some recent debate as to whether credit scores should be used to help determine premium rates. Certain advocacy groups have actually protested its use, stating that minorities will be disproportionately affected by the use of credit scores. They also claim that many people don’t understand how their credit can affect their premium rates.

Some states, such as California, Hawaii, and Massachusetts, have already done away with the use of checking credit scores.

Aside from some states restricting the use of credit history to determine the premium rates, some insurers like Nationwide have may some exceptions as well. Compare says that Nationwide has an extraordinary life circumstance policy that allows a customer to request a reconsideration on a premium affected by their credit score. They might reconsider and revise the premium if the poor credit occurred due to military deployments, serious illness, divorce, or a catastrophic event.

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