The relationship between auto insurance payments and credit scores is a bit murky, with insurers, credit reporting agencies and researchers trying to define the trends, consequences and ethics of late bill payments. One thing is certain, though: paying your car insurance bill late, or not at all, has serious consequences.
A late car insurance payment won't directly affect a credit score because insurers don't report their customers' payment histories to credit reporting agencies. Since the insurance company isn't extending credit, in most cases, to its customers, it doesn't report payment or non-payment of insurance bills. That means your credit score won't take a huge hit after a later payment.
Disagreement persists whether insurance agencies should check consumer credit scores before pricing insurance. Credit agencies say it's unethical. United Policyholders, a non-profit advocate for consumers, says the practice is unfair because consumers are penalized for issues that aren't related to insurance, like bankruptcy or medical expenses. Automotive information and research site DMV.org, however, says years of study have shown that drivers with low credit scores tend to be a bigger risk behind the wheel. Whatever your opinion, the practice isn't illegal and is likely to continue.
Rates and Scores
Credit scoring, as it's called, happens when insurance agencies check credit reports before offering policies to potential customers. A lower credit score generally leads to a higher insurance premium while a higher score leads to a lower premium. Policy underwriters may assume, rightly or wrongly, that people who don't pay their credit card bills won't pay their insurance bills either.
No Payment, No Policy
An auto insurance company may extend a grace period for their better customers when a payment is late. If you're not in that group, your coverage might be cancelled. If that happens, look out for a snowball effect. You may find it difficult to find insurance through another carrier. Don't think, "Well, I won't pay this, I'll get insurance somewhere else" when you're in a financial bind. Your rates can end up as much as four times higher than before.
- Insure.com: The consequences of late car insurance payments
- InsuranceLibrary: Does Car Insurance Affect Your Credit Score?
- Experian: Not paying utility bills and insurance could hurt credit scores
- DMV.org: How auto insurance companies calculate risk
- United Policyholders: Credit Scoring in Insurance: An Unfair Practice
Brian Stankich began working in banking and insurance after obtaining a Bachelor of Science in economics from Purdue University. He later directed an international NGO in southern Europe and has certifications in skills and development training and coaching.