It is no secret that you need high credit scores to get the best car insurance in Chicago, Detroit, New Orleans, or any other major American city. Although insurers usually have their own scorecards to predict the risk of prospective customers when it comes to filing claims, FICO scores are heavily factored into their algorithms.
What many people do not realize, however, is the fact that insurance products can also affect credit scores. To understand the interplay between the two, let us explore the ways your auto insurance can damage your credit.
Car insurance companies perform credit checks all the time. Contrary to popular belief, though, such inquiries do not affect FICO scores. More often than not, your insurer will only perform a soft pull, an activity that does not indicate that you are seeking credit. It will only appear on your personal credit report and will remain private to creditors.
In other words, auto insurance shopping itself should not harm your credit. However, some people claim that a car insurer conducts a hard pull, the kind that knocks points of FICO scores, on their credit. Whether they are correct or not, it is imperative not to rule it out.
To make sure your credit scores stay intact when asking for insurance quotes, find out your prospective insurer’s disclosure about credit inquiries.
Late or Missed Payments
Another way your insurance can pull down your FICO scores over time is dealing with premiums you cannot manage. As your payment history is the most influential element of most credit scoring models, delinquency can surely grab the attention of credit bureaus.
Generally, you will have the option to pay either annually or monthly. The former is always more advantageous because it reduces the chances of missing payment since you only have to deal with one bill, and the interest is less. If you decide to pay on installment to afford your car insurance, do it even if it means increasing your frequency of payments in 12 months and absorbing higher interest.
But then again, this only matters if your insurance carrier is a consistent data furnisher. As insurance companies are not required to report consumer credit data to credit bureaus, your payments may not have an impact on your FICO scores over the long term.
Overused Credit Cards
Thanks to credit card payment services, you can now pay for almost anything with plastic. While it has clear advantages, it has pitfalls too. Maxing out your credit cards, even if you zero them out every due date, may drive down your FICO scores. The effect is even worse if you cannot pay your balances in full every month.
Usually, credit utilization account for 30% of FICO scores. Interestingly, the ideal maximum usage of your credit card limits per month is also 30%.
Inaccurate Reported Data Sets
If your car insurer sends information to credit bureaus, any incorrect detail about yourself and your payment history may negatively affect your FICO scores. There is no other way to resolve this than by reviewing your credit reports regularly to spot errors early and address them ASAP to undo the damage they may have caused.
The relationship between insurance products and credit scores is something you should understand fully. The more you know about it, the more you can manage your finances more effectively.