How Is Car Insurance And Credit Score Related To Each Other?

Most Canadians believe that car insurance premiums largely depend on geographical location, driving record, type of vehicle, yearly travel, etc. However, did you know that your car insurance is related to your credit score as well?

Credit score and credit history are indicators of the financial discipline of a person. A credit score is a three-digit number that demonstrates the creditworthiness of a person. It states the possibilities of an insurance claim for road accidents.

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Car Insurance And Credit Score

Proponents of this practice in the auto insurance industry say that an individual with a high insurance score (based on the policyholder’s credit history) is less likely to get into a collision. Thus the premium offered by the insurer is estimated from the credit score.

Even studies have found out that a high score helps simplify an insurance claim filing compared to a low one. But some may find a contentious perspective to this argument. The opponents claim that the insurance score is absolutely unrelated to the risk of being physically injured in a car accident.

If we go by global standards, all auto insurance companies access your credit score when you apply for car insurance, and it can potentially influence the premium you pay. However, in Canada, an insurer can correlate your car insurance and credit score depending on the province you reside in.

In some parts of Canada—such as in the province of Ontario, Newfoundland, and Labrador—it is unlawful to use your credit score while underwriting car insurance. As per IBC, the insurance company can consider factors like your accident history and criminal convictions, but not your credit score.

In some provinces like Alberta, explicit consent from a potential client is mandatory to access their credit score. Talking of other regions, insurance companies can tap into an individual’s credit score when making auto rate risk calculations.

Various Aspects An Auto Insurer Looks At

As outlined above, this practice of looking at credit scores is not as prevalent in Canada as it is in the USA. Nevertheless, all auto insurance companies rely on the credit history and insurance score of a person to decide on the premium rates.

The logic they work on is if people are responsible for their credit, they are more likely to be responsible with their cars. Good credit means that there are high chances of a driver following the traffic rules and keeping their automobiles in good condition.

As per IBC, the credit score is a minor contributor in calculating the cost of insurance. The other factors analyzed by the insurance company that will still result in reasonably-priced quotes are:

1. A good driving record
2. Demographics details like location, gender, age, and marital status
3. Type of vehicle
4. Type of policy, coverage amounts, and the deductibles
5. History of avoiding tickets and accidents

It is important to note here that the Insurance Bureau of Canada (IBC) has discretionary rules of conduct that prohibits auto insurance companies from:

• Denying or cancelling insurance policies based exclusively on a bad credit score
• If an applicant doesn’t have any record of his borrowings, he/she cannot be denied a policy.

Instead, the rules want the underwriters to:

• Procure a client’s permission to see his/her credit report
• Take into account extraordinary state of affairs pertaining to any client (like any severe ailment or physical disorder) while scrutinizing his/her credit report and score

How To Check My Credit Score?

One can get a free credit report from the designated credit bureaus operating in one’s country. Equifax and TransUnion are two primary credit rating bureaus that operate in the provinces and territories of Canada.

On payment of a nominal fee, the credit rating firms provide you with an option to electronically retrieve your credit score data. Alternatively, you can acquire a hard copy of the “credit file disclosure”/ “consumer disclosure” report from them but the facility can only be used annually.

The client needs to send a written request to the concerned agency/department along with two copies of his identity documentations. Please note that it might take nearly 20-21 days for these organizations to act on the application.

Pro Tip: It’s a good idea to check your credit score status once a year. Gathering your credit report doesn’t affect your credit score so there’s nothing to lose.

What Does My Credit Score Include

While determining your insurance premium, a car insurer will look at your credit-based insurance score. As per the Insurance Bureau of Canada, typical Credit scores consist of:

• 40% weightage is given to the client’s debt payments (both past and current)
• 30% weightage is given to his outstanding debt in the market
• 15% weightage is given to the Credit History of the client
• 10% weightage is on 10% of the Client’s new credit applications
• 5% weightage is calculated on the Client’s credit lines

How To Improve Your Credit Score?

A standard thought process works in the insurance segment almost everywhere around the world. A good credit score reflects a “good metric of financial responsibility”. This means that individuals are less likely to get into an accident.

In the absence of a decent credit score, you tend to pay higher premiums. In such circumstances, you can save yourself by improving your credit score in the following ways:

• Don’t delay the payment of bills: Pay before the due date. Ideally, you should set up automatic payments (with certain limits).
• Bring your account current to catch up with any due accounts of the past. Keeping an account current can improve your score drastically.
• Use your credit prudently. Lower your higher revolving account balance that affects the credit utilization rate (CUR). This can be done by paying credit card debt. People with less CUR have a high credit score.
• Consider having an older credit account. This will increase the length of one’s credit history.
• Try to keep your credit file up-to-date and accurate. Check for any mistakes or fraudulent activities in your file.
• Don’t indulge in too many credit checks and applications. This may go against you because too many inquiries may lead to suspicion.

Endnote

To conclude, the practice of using your credit score to calculate car premiums is fairly common in Canada and the U.S. Eventually, a good credit score can earn you low rates. Conversely, a bad credit-based insurance rating may lead to high premiums. Thus, it’s always a good idea to check your credit score status.

Pro Tip: Check various insurers before you zero in on one. Not every auto insurance company asks your credit score to calculate your premiums–even if IBC rules permit it in your province.