Your credit score (also called a credit rating) is important because it helps banks, mortgage providers and credit card companies work out whether or not to lend you money.
And sometimes insurance companies use it too. Here’s how it all works.
If you pay for your car insurance in one lump sum, your credit score won’t be affected at all.
But if you pay monthly, it usually will. Your insurance provider is giving you a year’s worth of car insurance and allowing you to pay it off month by month. You’re entering into a credit agreement with them, which is a type of high-interest loan.
And, just like when you apply for a loan, this credit agreement leaves a little mark on your credit report. That’s because your insurer will look at your credit file to check if you can pay them back. And that “hard check” can be seen by other creditors in future.
Lots of these marks in a short space makes it look like you’re in financial trouble. And that can bring down your score.
Paying monthly is also more expensive, because you’ll be charged interest on the amount you owe.
(Spreading the cost of your car insurance can help with budgeting, but it’s full of downsides. We’re changing the way this works at Cuvva with a new kind of pay-monthly car insurance.
Most insurers will check your credit report. But there are two different kinds of credit check: “soft searches” and “hard searches”.
A “soft check” or “soft search” means someone checks your credit report just to make sure you’re not lying about who you are.
Soft checks don’t affect your credit score, and only you can see a record of them.
If you pay for a whole year of car insurance up-front, your insurer will only run a soft check.
But if you want to pay monthly, your insurer will (usually) run a hard check.
And that's because most pay-monthly insurance policies are credit agreements. (If you're not being given credit, your insurer won't be allowed to do a hard check.)
These hard checks are visible on your report to anyone who runs a credit check on you in future.
And having lots of hard checks on your credit report can lower your credit score - especially if you keep getting rejected.
This can be another good reason to pay up front, especially if you’re planning to apply for something big anytime soon (like a mortgage).
A company should always tell you before they run a hard check on your credit file.
When you spread the cost of your car insurance over the year, most insurance companies will ask for a deposit up front. So you’ll still need to have some cash at hand.
If paying monthly is your only option, an insurance company will hard check your credit report before they approve your application. If you have a bad credit score, they could decide you're too risky to lend to and reject your application.
If you have a bad credit rating you might be better off finding another way to pay for your car insurance - like a credit card - rather than taking out another loan with an insurer. (Just bear in mind that some insurance companies do charge a bit more if you want to pay by credit card.)
Insurance companies work out the price you pay based on how risky they think you are.
There are all sorts of things they take into account when setting your price – even your job title and postcode. A bad credit score doesn’t help, because it makes it look like you’re not very good at handling debt.
People with bad credit scores are also more likely to make a claim, and that can add a hefty chunk to the price of your car insurance.
It could also increase your excess.
These extras are on top of the interest you’ll be paying on a monthly repayment plan, which, sadly, can also be more for those with a history of credit trouble.
Getting a quote for car insurance (whether that’s through a comparison site or directly with the insurer) won’t affect your credit score.
When you ask for a quote, insurance companies will run a soft check at most.
It’s only when you apply that a hard check comes into it. And again, that’s only if you pay monthly.
When you take out an insurance policy, you’ll be given a 14-day ‘cooling-off period’ in which you can change your mind. (Insurance companies have to give you a cooling-off period, by law.)
If you do change your mind and decide to go with another insurer, the first hard check will be on your record, and you’ll have another one for your new application.
That might be a problem if you’re trying to improve your credit score.
But it’s not all bad news if you pay monthly for car insurance.
A car insurance policy paid monthly is a kind of ‘instalment loan’, and these monthly payments show up on your credit report. If you pay in full and on time every month, this can build up your credit score over time.
If you are late or miss a payment, this will bring down your credit rating. Your insurer could also cancel your policy. Setting up a direct debit payment is the best way to make sure this never happens.
(Not paying car insurance can also land you with a County Court Judgement, which is no fun at all.)
Like the overall price of your car insurance, your compulsory excess is also worked out using lots of different bits of information about you.
This usually includes stuff like your age, postcode and the car you drive. But it could also include your credit score. Especially because the data shows that people with low credit scores are more likely to make claims.
Cancelling your car insurance policy shouldn’t affect your credit score, whether you pay monthly or annually. As long as you cancel it properly.
If you pay monthly, you can’t just cancel your direct debit. You’ll need to tell your insurer you want to cancel and pay any admin fees.
If you don’t cancel your policy properly, you’ll get a bunch of missed payments on your credit record. And because pay-monthly car insurance is a credit agreement, it could be bad news for your credit score.
If you do miss any payments, it’ll stay on your car insurance record for about 7 years. 😬
Temporary car insurance policies usually last between 1 day and 1 month. You pay for the cover up front, so they don’t have any impact on your credit score.
Named drivers don’t get credit checked, either. That means the named driver doesn’t have to worry about it showing up on their credit report. And the main policyholder doesn’t have to worry about the price of their insurance going up if the named driver has a bad credit score.
In the UK, there are three Credit Reference Agencies (CRAs) that collect information about you to give to lenders: Experian, Equifax and TransUnion.
Each of them has its own scoring system and rating scale. This means you don’t have one universal credit score, you actually have three.
When you apply for credit or a loan, a lender hard checks your credit report with one or more of these companies. It shows them some basic information about you, such as your name, address and date of birth. They’ll also see how many times you’ve applied for loans, how much money you owe, and your track record of repayments.
Just like any other credit companies, different insurers will use different Credit Reference Agencies to run credit checks. So it’s worth checking your score with each of them to make sure you’re covering all the bases.
It’s useful to know your score, because it gives you a good idea of how successful you’ll be when applying for credit.
Keeping your credit rating in good shape can also get you better deals on loans.
You can ask any one of these companies for a statutory report for free. This is the same information a lender will see about you.
You can find out how to get a copy through the Information Commissioners’ Office.
Or you can sign up with one of the three companies to get regular access to your score and the information in your file. But sometimes you have to pay a monthly fee for this.
Updated on 11th November 2020