All you need to know about credit score and its impact on car insurance cost

In recent years, credit scores have become increasingly significant in financial dealings worldwide. The Philippines is no different, while the use of credit scores to assess car insurance premiums is still a developing practice. We see there is a growing trend among insurance providers to include credit-based insurance scoring in the premium calculations.

Credit-based insurance score  A credit-based insurance score is a variant of your regular credit score, designed to predict how likely you are to file an insurance claim.

But why do insurance providers do so? Well, it is all to estimate the risk levels, as research suggests that individuals with higher credit scores tend to file fewer claims. Insurers believe that the behaviors that lead to a low credit score — such as missed payments or high debt — also increase the likelihood of filing claims.

Furthermore, research suggests that there is a correlation between lower credit scores and increased claim rates, and this rationale is gradually being adopted in the Philippines.

Also Read: 4 Smart reasons to refinance your auto loan

Understanding how credit score impacts car insurance costs

Low credit score - High premium	A lower credit score may result in higher car insurance premiums. This is because insurers consider individuals with lower scores to be at higher risk of filing claims, committing insurance fraud, or missing payments.
High credit score - Discounts by insurers	Individuals with high credit scores can often qualify for discounts or better terms on their insurance policies. They may receive more favourable payment plans, lower interest rates, and reduced premiums.
High credit score - Rigid payment plans	Insurers may be more willing to offer installment payment options if you have a strong credit history.
Low credit score - Flexible payment	Individuals with lower scores may be required to pay a larger portion of their premium upfront

Additional factors affecting car insurance premiums

While credit scores are a growing factor in determining car insurance costs in the Philippines, other well-established factors also play a significant role including -

Age & driving experience	Young drivers: Younger drivers, particularly those under the age of 25, are statistically more likely to be involved in accidents. As a result, they typically face higher insurance premiums. Experienced drivers: More experienced drivers, particularly those with a clean record, enjoy lower rates.
Vehicle make & model	Luxury/sports/high-powered engine cars: Such cars usually cost more to insure because they are more expensive to repair or replace. Sedans/economy cars: Such cars usually have strong safety ratings and low theft risk and therefore often come with lower premiums.
Driving record	Bad driving record: Those with a history of violations or claims are considered high-risk, resulting in higher premiums Clean driving record:  Drivers with a clean record pay less premium.
Location	Urban/heavy traffic/thigh heft rate area: If you live in such an area, your car tends to come with higher premiums. Rural/less traffic area: Living and driving in such areas will likely lead to low insurance costs.
Annual Mileage	Drive more:  The more you drive, the higher your risk of being involved in an accident, which increases your insurance premiums. Drive infrequently: People who use their cars infrequently can benefit from lower premiums.
Type of Coverage	Comprehensive insurance policies: Such policies offer more protection but come with higher premiums compared to minimum liability coverage. Higher deductible: Choosing a higher deductible can also lower your premium because you agree to pay more out-of-pocket in the event of an accident.

Key takeaways -

• Insurers believe that poor financial management — reflected by a low credit score — correlates with a higher likelihood of riskier behaviour on the road.
• A higher credit score signals to insurers that the individual is financially responsible, which correlates with lower risk.
• Credit score can also influence whether you're offered flexible payment terms.
• A driver’s history of accidents, traffic violations, and claims has a direct impact on their insurance costs.
• The area where you live and a driver’s history of accidents, traffic violations, and claims have a direct impact on insurance rates.

Also Read: Important financial terms a car buyer must know

Tips to manage & improve your credit score to lower insurance costs

If your credit score is affecting your car insurance premiums, there are several steps you can take to improve it, which may ultimately lead to lower costs. The list includes -

1. On-time bill payment

Make sure to timely pay credit card bills, loan EMIs, and other financial obligations, this will help improve your credit score. Late or missed payments are among the most common reasons for a lower credit score.

2. Reduce debt

Remember, high levels of debt negatively impact your credit score. Working towards paying off existing debt, particularly credit card balances, can improve your credit score over time and make you eligible for better insurance rates.

3. Avoid frequent credit inquiries

Applying for multiple loans or credit cards within a short time frame can lower your credit score. It’s better to be selective when applying for credit and avoid frequent inquiries.

4. Regularly monitor your credit report

Regularly checking your credit report allows you to spot errors that could be negatively affecting your score. Also, taking up inaccuracies with the credit bureau can result in a higher credit score

Using credit score to access car insurance cost Pros & Cons

Pros	Cons
Better risk assessment: Credit-based insurance scores give insurers an additional tool to assess the risk of insuring a driver, potentially leading to more accurate pricing of premiums.	Impact of financial hardships: A single financial crisis, such as job loss or a medical emergency, could drastically lower a person’s credit score and unfairly raise their insurance costs.
Incentive to improve credit: Knowing that a good credit score can reduce insurance costs may motivate individuals to manage their finances more responsibly.	Lack of awareness: Many people may not realise that their credit score affects their insurance premiums, leaving them unable to take steps to improve it.

Bottom line

Understanding how your credit history impacts your premiums is essential for a car owner in the Philippines, especially since the link between the two is becoming more apparent. While credit-based insurance scoring is still a developing practice, maintaining a good credit score can help you secure lower premiums and better payment terms.

Also Read: Car loan scams in the Philippines: Applicants be aware