How auto insurance and credit score relate to each other?


Most Canadians believe that auto insurance premiums largely depend on geographic location, driving record, type of vehicle, annual trips, etc. However, did you know that your auto insurance is also linked to your credit score?

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

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Auto insurance and credit score

Proponents of this practice in the auto insurance industry claim that a person with a high insurance rating (based on the policyholder’s credit history) is less likely to have a collision. Thus, the premium offered by the insurer is estimated from the credit score.

Even studies have shown that a high score helps simplify filing an insurance claim compared to a low score. But some may find this argument controversial. Opponents claim that the insurance score has absolutely nothing to do with the risk of being physically injured in a car accident.

If we follow global standards, all auto insurance companies access your credit score when you purchase auto insurance, and this can potentially influence the premium you pay. However, in Canada, an insurer can correlate your auto insurance and your credit score based on the province where you reside.

In some areas of Canada, such as the provinces of Ontario, Newfoundland and Labrador, it is illegal to use your credit score when purchasing auto insurance. According to the IBC, the insurance company may take into account factors such as your accident history and criminal convictions, but not your credit score.

In some provinces such as Alberta, the explicit consent of a potential customer is required to access their credit rating. Speaking of other areas, insurance companies can tap into an individual’s credit score when calculating auto rate risk.

Various aspects that an auto insurer examines

As noted above, this practice of reviewing credit scores is not as prevalent in Canada as it is in the United States. Nonetheless, all auto insurance companies rely on a person’s credit history and insurance rating to decide premium rates.

The logic they are working on is that if people are responsible for their credit, they are more likely to be responsible for their cars. Good credit means there’s a good chance a driver will obey traffic rules and keep their cars in good condition.

According to IBC, the credit score is a minor contributor in calculating the cost of insurance. Other factors analyzed by the insurance company that will always result in quotes at reasonable prices are:

  1. A good driving record
  2. Demographic details like location, sex, age and marital status
  3. Vehicle type
  4. Policy type, amounts of coverage and 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 prohibit auto insurance companies from:

  • Refuse or cancel insurance policies based exclusively on bad credit
  • If a claimant has no record of his loans, he cannot be denied a policy.

Instead, the rules want underwriters:

  • Get a customer’s permission to view their credit report
  • Take into account the extraordinary situation concerning any client (such as any serious illness or physical disorder) while scrutinizing their credit report and score

How do I check my credit score?

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

On payment of a small fee, credit rating agencies offer you the option of electronically retrieving your credit score data. Alternatively, you can acquire a hard copy of the “Credit Report Disclosure” / “Consumer Disclosure” report from them, but the facility can only be used annually.

The client must send a written request to the agency / service concerned, accompanied by two copies of his identity documents. Please note that it may take up to 20-21 days for these organizations to act on the request.

Pro tip: It’s a good idea to check your credit score once a year. Collecting your credit report does not affect your credit score, so there is nothing to lose.

What’s in my credit score?

When determining your insurance premium, an auto insurer will look at your insurance score based on credit. According to the Insurance Bureau of Canada, typical credit scores consist of:

  • A 40% weight is given to customer debt payments (past and current)
  • A weighting of 30% is given to its outstanding debt on the market
  • A 15% weighting is given to the customer’s credit history
  • The 10% weighting is on 10% of the Client’s new credit requests
  • A weighting of 5% is calculated on the Customer’s credit lines

How To Improve Your Credit Score?

A standard thought process works in the insurance segment almost anywhere in the world. A good credit rating reflects a “good measure of financial responsibility”. This means that people are less likely to have 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 paying bills: Pay before the due date. Ideally, you should set up automatic payments (with certain limits).
  • Bring your account up to date to catch up with all past due accounts. Keeping an account up to date can dramatically improve your score.
  • Use your credit with caution. Reduce your higher revolving account balance which affects the credit utilization rate (CUR). This can be done by paying off the credit card debt. People with less CUR have a high credit score.
  • Consider having an old credit account. This will increase the length of his credit history.
  • Try to keep your credit report up to date and accurate. Check if there are any errors or fraudulent activity in your file.
  • Don’t indulge in too many credit checks and applications. This can go against you because too many investigations can lead to suspicion.

End note

In conclusion, the practice of using your credit score to calculate auto premiums is quite common in Canada and the United States. Eventually, a good credit score can earn you low rates. Conversely, a bad credit-based insurance rating can result in high premiums. So, it is always a good idea to check the status of your credit score.

Pro tip: Check out different insurers before focusing on just one. Not all auto insurance companies ask your credit score to calculate your premiums, although IBC rules allow it in your province.


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