Does Paying Car Insurance Build Credit?

5paisa Research Team Date: 13 Feb, 2024 02:25 PM IST

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Can paying car insurance build credit? Purchasing your dream car might be a great investment. But with dreams coming true – there comes additional responsibilities. Car maintenance is part and parcel of a car owner's life. However, one cannot undermine the significance of buying car insurance.

Car owners already understand the importance of having vehicle insurance coverage. Most car owners in India understand the significance of the insurance but most neglect paying the amount on time. Making such a habit might affect your credit score. So, does paying car insurance build credit? Let's check the points to understand the matter in brief.

Does Paying Car Insurance Build Credit?

Will paying car insurance build credit? Paying your vehicle insurance doesn't directly build your credit score. However, it might affect the chances of future loans with a lower credit score. That's the reason making payments on time (for your premiums) helps you get future loans. While it doesn't affect your credit score – it indirectly influences your CIBIL score. 

Timely payments reflect positive impacts on the score. On the other hand, negligence in paying the insurance premium on time may result in a lowered CIBIL score. Missed or late payments might make things worse for future loans. The lender either approves your loan with a higher interest rate or simply rejects your application. 

Paying your vehicle insurance improves your creditworthiness and reduces rates. It shows your responsibility toward making timely payments. You can pay your bills and maintain a positive CIBIL history. 

Does Your Credit Affect Insurance Rates?

Are you wondering – does paying car insurance build credit? Well, an excellent credit history helps you get better insurance premiums. When the CIBIL score is low, the insurance premium might become higher. Note that someone with a low CIBIL score might not be eligible for higher coverage plans. 

A good credit score allows you to buy a better insurance plan. Your credit history assesses your insurance score. Thus, with a good CIBIL rating, a car owner may get insurance plans at lower rates. Here's how you can calculate your credit score before opting for an insurance premium:

Account Verifications or Mortgage

The CIBIl score is assessed by the credits and EMI loans.

New Line of Credit
Details on the new accounts are taken to compare them with other accounts. It also determines parameters, including issues with repayment loans and enquiries.

Credit History Timeline
Financial institutes monitor your financial activities from the time you borrow the loan. So, when you have a longer credit history, it becomes better for you to apply for a loan.

Total Debts
It assesses the amount you have to pay back to lenders alongside repayment methods. Repayment consistency is another factor that is determined here. Someone with zero balance in the account will have better chances of getting higher insurance coverage.

History of Your Repayment
It assesses the repayment history and other negative records considering the repayment. It also considers the failure to repay the EMI or amount within your due date.

Effect of NOT paying your car insurance

Here's the list of repercussions of not paying the car insurance on time:

Legal Consequences
All vehicle owners should get insurance, as per the Motor Vehicle Act. So, each vehicle owner must have an active and valid insurance policy to drive on Indian roads. Failure to do so may result in imprisonment for three months or huge penalties.

Lose Your Coverage
The policy lapses when you are unable to pay the premiums on time. So, you won't be able to raise the claims for that particular timeframe. So, if any unfortunate incidents occur during this time, you won't have an insurance policy to get financial coverage.

An Increased Premium Amount
Your insurance company will have a record of you not paying the insurance on time. So, they may increase the rate of premium. So, when you buy the new policy, you will pay a higher premium.

No NCB Perks
Failing to pay the car insurance on time means you won't get the NCB. So, you won't be able to receive the maximum 50% discount for a no-claim bonus. That's more evident if you don't raise claims for 5 years (consecutively).

Check Your Credit for Opportunities to Improve

Do car insurance payments build credit? You can check and improve your credit score by paying your debts timely. Here's what your CIBIL score indicates:    

750-900 score: It means you have paid the loans consistently and don't have problems getting the approval of loans.
700-750 score: A few banks and financial institutes research why your score is 700 or 750 even when you haven't defaulted on credits.
550-750: Having a CIBIL score between 550 and 750 means you may have defaulted on some past credits. This score might mean you are ineligible for specific banks, or you may get the loan approval at higher rates.
300-550: Someone with a 300 to 550 score has serious issues getting their loans approved. You may need to appeal to the authority with written documents stating the reasons why you need the loan.

Conclusion

Your CIBIL score might save you money when it comes to buying vehicle insurance. So, now you understand how your credit score may affect your insurance charges. 

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Frequently Asked Questions

Cancelling the vehicle insurance would not hurt your credit directly. However, you should be careful while moving from one insurance company to another. The insurer might conduct a hard enquiry to understand your financial habits. 

Various auto insurance companies consider your CIBIL score. These companies use the score to assess the policyholder's risk.

Looking for a vehicle insurance plan for bad credit entirely depends on individual circumstances. You might shop around and compare quotations from different insurance companies. That's how you can get the best insurance for bad credit.