How car insurance affects your credit score

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Car insurance and credit reports
Getting insurance with bad credit
Paying monthly can improve your credit score
Credit scores and excess
Not cancelling properly can affect your credit
Temporary car insurance and credit scores

Your credit score (also called a credit rating) 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.

Does car insurance go on your credit report?

If you pay for your car insurance in one lump sum, your credit score won't be affected at all.

But if you use have traditional pay-monthly car insurance, 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.

The agreement will appear on your credit file, and any late repayments will cause your score to go down. And you'll have to pay interest, making your insurance more expensive.

Do insurers check your credit report?

Most insurers will check your credit report. But there are two different kinds of credit check:

Soft credit checks

A "soft check" or "soft search" is when a company checks your credit file to make sure you're not lying about who you are.

You're not being judged based on your credit history, it doesn't affect your credit score, and only you can see how many soft checks you've had.

If you pay for a whole year of car insurance up front, your insurer will only run a soft check.

Hard credit checks

If you want a traditional pay-monthly payment plan, your insurer will (usually) run a hard credit check.

That's when they actually look at your credit history and score, and decide if they want to lend to you. These hard checks are visible on your report to anyone who runs a credit check on you in future.

Having lots of hard checks on your credit report can lower your credit score, especially if you keep getting rejected. That's because making lots of credit applications can make it looks like you're having financial trouble.

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).

By the way, companies aren't allowed to perform hard credit checks without telling you — they have to let you know first.

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Some insurers might reject your application if you have a bad credit score

They'll do this if they think that you're too "risky" to lend to.

If your credit score is low, 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.

Your car insurance can impact yout credit score
Your car insurance can impact yout credit score

Having a low credit score can also raise your premium

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.

Some data also shows that 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.

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.

How getting car insurance quotes can affect your credit score

Getting a car insurance quote (yes, that was a sneaky plug 👀), 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 might come 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.

How your postcode impacts your premium 🏠
Your address could be increasing your car insurance bill Read more.

Why paying monthly can 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.)

Pay-monthly insurance could improve your credit score
Pay-monthly insurance could improve your credit score
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How your credit score affects your excess

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.

Read more 📚
Car insurance excess: the ultimate guide. Learn more

If you don't cancel your car insurance properly, it could affect your credit score

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. 😬

Cancelling car insurance ❌
The ultimate guide on cancelling your car insurance. Learn more

Temporary car insurance policies (and being a named driver) won't affect your credit score

Temporary car insurance policies usually last between 1 hour 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.

The big three Credit Reference Agencies (CRAs)

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.

How to find out your credit score

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.

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Updated on 30th March 2023