A good credit score means you are a responsible borrower and you will likely have a lower car insurance premium than someone with a bad credit score, according to Budget Insurance.
A good credit score means you pay off your debts consistently and on time, and you don’t spend too much of your available credit too often.
We spoke to Tyrone Lowther, head of Budget Insurance, to find out how and why your credit score affects your monthly car insurance premium.
Credit scores and car insurance
Lowther said when calculating an applicant’s risk, a credit score is taken into account alongside factors such as the make and model of the car, address of the owner, previous claims history, purpose of the vehicle, and where the vehicle is kept at night, as these elements “serve as a lifestyle and risk indicator.”
A good credit score therefore means you’re less likely to default on your monthly insurance premium, which makes you a less risky person to insure in the eyes of the insurer.
Lowther said at Budget there is no minimum credit score for a person to be insured, but that a score above 670 would be considered good.
Credit scores range between 400 and 900, and Lowther said the Credit Bureaus place all individuals on the same scoring scale which insurers then use to determine the impact of their credit score on their monthly insurance premium.
Improving one’s credit score over the time of the insurance policy also results in favourable adjustments to your premium, as changes in a customer’s credit score is taken into account at the annual policy review stage, he said.
At premium review stage, customers receive the benefit of the depreciation in value of their vehicle as well as that of an improved credit score, in terms of their premium calculation
“Were it not for this adjustment, the increase a customer receives (if any) would be higher,” said Lowther.
However, Lowther said a much larger determinant of your monthly insurance premium is the cost of repairing the vehicle rather than your credit score, or even the vehicle’s value.
“Rectifying damage to modern vehicles can be a very costly affair and the cost of repairing a vehicle this year will be substantially more than the same time last year, even though that vehicle may have depreciated by as much as 10-15%,” he said.
“So, while your credit score may have improved, and the market value of your car may be lower, the premium is providing cover against damage incurred more than anything else.”
A relatively low percentage of accident-damaged vehicles are actually written off and an estimated 90% of vehicles involved in accidents are repaired and put back on the road, according to Lowther.