How Credit Score Affects Car Insurance Premium?

Let us say that you purchased a car and your friend purchased the same car same model on the very same day. However, you may notice that the car insurance premium of your car may differ from your friend’s car insurance premium. Ever wonder why? When you purchase car insurance, the insurance companies take several factors into consideration before deciding the premium amount on your car insurance, such as the history of an insurance claim, age of driver, age of the car, car depreciation value, history of accidents and black points on driving license. However, one of the significant factors that determine your car insurance premium is your credit score. Car insurance and credit score go hand in hand, which is why it is important for you to maintain a good credit score.

How car insurance Premium is determined by credit score?

Before we discuss credit score, it is important to explain the relationship between credit score and car insurance premium. Your car insurance premium is inversely proportional to your credit score, which means the higher your credit score is, the lower your car insurance premium will be. Car owners with good credit scores receive car insurance at a lower insurance premium. On the other hand, finding cheap car insurance with a bad credit score might prove to be a firm challenge.

However, the insurance companies do not simply use your credit score; they consider a credit-based insurance score.

Why car insurance premium is determined by credit score?

According to research, insurance companies use the credit score to effectively reduce their losses caused by insurance claims. All around the globe, insurance companies use credit-based insurance scores to determine the probability of a customer raising an insurance claim. Why? When you pay the car insurance premium, the company promises to pay you in case your car suffers any damage or you incur any physical damage or the third party suffers any damage. However, the company (secretly) hopes that you do not raise an insurance claim because when you raise an insurance claim, the company loses profits. Therefore, the company prefers customers who are less likely to raise an insurance claim. Therefore, car insurance is based on credit scores.

What is a credit score?

All information from your account balance to the total number of accounts you possess for credit cards is stored with Al Etihad Credit Bureau (AECB). Based on your finance report, your punctuality towards credit card bill payment and other factors determine your credit report. On the basis of your credit report, AECB assigns you a credit score. This credit score depicts your reputation as a reliable borrower in the market. The credit score in the UAE usually varies from 300 to 900. The closer you are to 900, the better your credit score is. From this credit score, insurance companies check your credit-based insurance score to decide your car insurance premium.

What is a credit-based insurance score?

A credit-based insurance score is a rating that uses certain aspects of the credit history of a person and eliminates several other factors to predict insurance losses.

What factors determine credit score?

Missing Credit Card payment

Your payment habits are reflected in your credit score. If you are a punctual borrower and repay the borrowed amount on your credit card on time, then your credit score will be high. However, in case you miss a credit card payment, it will reflect on your credit report for the next 7 years.

Late Payment

Even a single late payment can pull your credit score down. The late payment fee will reflect in your credit report and your credit score will reduce by a few points. However, over time, you can rebuild your credit score by maintaining consistency in payments.

Irregular card utilisation

Every finance expert will suggest you not to use more than 30% of your credit limit on any credit card. Using more than 30% of the credit limit often hurt your credit score since it reflects a burden on your credit card and poor management of your finances.

Closed an old credit card

Usually, a credit score is also determined by the age of your credit account. Let us say that you purchased your first credit card in 2013 and continued to manage a good track record on your credit card, but suddenly in 2021, you decided to close this credit card due to some reason. Under such circumstances, all the good influence created by managing that particular credit card will also disappear along with the credit card from your credit score. Consequently, your credit report will be affected and you might end up losing some points.

Delay in paying loan instalment

Paying a late loan instalment is never a good idea. The AECB keeps a close eye on your account when you take a loan. The moment you fall behind on your repayments, your credit report reflects it and your credit score takes a serious hit. 

A significant shift in your financial condition

Finances can be unpredictable. If your savings are ever affected and you are under debt, your credit report will reflect that and will affect your credit score significantly.

All these factors play a crucial role in determining your credit score. Insurance companies use your credit score to decide your car insurance premium and if you are looking to purchase car insurance with a bad credit score, be prepared to shell out some extra Dirhams.

Is there any way of rectifying the credit score to reduce the car insurance premium?

Yes! Follow these tips to improve your credit score and reduce your car insurance premium:

Pay outstanding on your credit in time

Always be punctual about your due date and repay the outstanding amount at least 3 days before the due date. If you are facing any difficulty in making your credit card bill payment, consider a balance transfer facility to get extra time for making the credit card payment. You can also make a minimum payment to avoid a black spot on your credit score.

Careful Management of credit

When you are using a credit card, be sure that you do not use more than 30% of the credit limit. You can certainly use more than 30% credit limit if necessary, but if you require paying a hefty bill, choose a credit card with a higher credit limit to ensure that your credit score is not hampered.

Loan Payment in time

If you have taken a loan, make EMI payments on time without any delay. If you are unable to pay your EMI on time, inform the bank and find other viable options to avoid a late payment or missing payment.

How can I reduce my car insurance premium if my credit score is bad?

If your credit score is bad, there are several other factors you can work on to ensure that your car insurance premium remains low:

Driving Record

Before offering you the car insurance premium, the car insurance provider checks your driving history to confirm if you are a reckless driver. If your driving record consists of records of accidents or exceeding parking tickets or black points, it is likely that the premium will be high. In case you wish to reduce your car insurance premium, ensure that you maintain a good driving record and follow traffic rules.

Driving Experience

The driving experience of a driver also determines the car insurance cost. The insurance company will check the date of your driving license to see whether you are a novice or an experienced driver. Though you cannot make any amendments to influence this factor, you can ensure that your driving licence, irrespective of age, remains spotless, i.e. without any pending tickets or black points.

Type of car insurance

If you purchase third-party car insurance, the premium will be lower than that of comprehensive car insurance. However, comprehensive car insurance is more beneficial since it provides your vehicle against any damage in case of an accident. However, you can be smart about comprehensive car insurance to pay the lower car insurance premium. For instance, if your car is old, purchase local garage repair instead of agency garage repair and save more money.

Conclusion

Credit Score and car insurance are parallel to each other. If you are purchasing car insurance with a bad credit score, you may require paying extra money. Therefore, do not ignore your credit score even if you do not want a credit card or loan because insurance companies use a credit score to decide your car insurance premium.