It’s normal to wonder whether your car insurance payments will build your credit. After all, you probably had to get a credit check when you applied for insurance, and you might mentally group your insurance premiums along with other regular bills (such as auto loan payments) that do affect your credit score.
However, despite what you might expect, paying for car insurance won’t build your credit. Your insurance payments have no effect on your credit score at all—unless your bills become severely overdue and your insurer sends them to a debt collector.
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Why won’t my car insurance payments improve my credit score?
Making your car insurance payments doesn’t affect your credit score because your car insurance isn’t a credit account.
Your credit score is calculated based on the information shown on your credit report. Insurance companies don’t report to the credit bureaus that create your credit reports, which means there’s no way for your insurance payments to show up and influence your score, either positively or negatively.
Generally speaking, bill payments only show up on your credit report when they’re associated with a credit account, such as a credit card or loan. Credit always involves borrowing money. Your car insurance doesn’t count as credit because there’s no money being lent to you; it’s just a service that you pay for each month.
How missing car insurance payments can lead to credit score damage
Although there’s no way to build your credit by paying your car insurance, it’s possible to hurt your credit if you go for long enough without paying.
That’s because, if you completely stop making payments, your insurance company may hire a debt collection agency to go after you for what you owe them.
Unlike insurance companies, debt collection agencies generally do report to the credit bureaus. Your unpaid debt will appear as a collection account on your credit report, which will severely damage your credit score.
It will also make it harder for you to get insurance in the future (which you’ll need to, since your car insurance provider will almost certainly cancel your policy after you stop paying). Going forward, you’ll probably also have to pay higher rates for insurance of all types, since providers will see that you stopped paying your previous policy and charge you more to compensate for the risk.
Will my credit score affect my auto insurance rates?
Yes, in most states, when you apply for car insurance, your insurance company will check your credit.
They won’t check your standard FICO score—instead, they’ll check a special “credit-based insurance score,” which FICO produces specifically for the insurance industry—but the end result will be the same, since both scores are closely correlated with each other.
If you have a bad credit score and a credit file that’s full of derogatory marks, they’ll charge you higher rates, and might deny you a policy entirely. 1
This is because statistically, people with poor credit are more likely to file expensive insurance claims. This might seem unfair if you have damaged credit through no fault of your own (e.g., expensive medical bills that you couldn’t have planned for), but unfortunately it’s the way the insurance industry works.
States that restrict insurers from checking credit scores
There are several states that ban car insurance providers from factoring credit scores into their policy decisions. These states include: 2
- California
- Hawaii
- Massachusetts
- Michigan
- Oregon*
- Washington*
* These states don’t outright ban insurers from looking at credit scores, but they do restrict the practice. If you live in one of these states, check your local laws for details.
Alternative methods of building credit
While paying your car insurance doesn’t build credit, there are a lot of other options for people who want to improve their credit scores.
The best method is also the simplest: just open a credit account, use it regularly, and make sure to always pay your bills on time.
If you’re looking into credit-building because your score is already damaged, you might have trouble getting a typical credit account. However, you can still qualify for one of the following:
- Credit-builder loan: Many smaller lenders and credit unions offer credit-builder loans, which are low-risk loans with minimal credit score requirements. These are specifically designed to help you build up a positive payment history on your credit reports.
- Secured credit card: A secured credit card is a special type of card that requires a security deposit when you open it. This deposit (which your card issuer can keep if you fail to make your payments on the card) reduces the risk they’re taking on, which makes these cards much easier to get, and consequently very well-suited to rebuilding your credit.
You can also look into getting a credit-building app. Some of these can bolster your credit history in surprising ways—for instance, by adding regular payments to your credit report that wouldn’t normally be there. Unfortunately, none of these will add your car insurance payments, but you can use them to build credit by paying your utilities and your rent.
