How your low credit score could be driving up your car insurance premiums

In India, where car ownership is now becoming the norm, it is helpful to know about the variables that influence car insurance premiums in order to be able to manage your finances in the best possible way.

While everyone knows about variables such as the make of the vehicle, age of the vehicle and driving history, many ask this question: How does a low credit score affect your car insurance premiums?

For this it is important to clearly understand the concept behind credit scores, how a low credit score influences your automobile insurance premiums (if at all it does) along with related issues. These points are elaborated below and should always be kept in mind:

Credit score awareness in India

Indian credit scores are mostly employed by lenders in determining the creditworthiness of the borrower i.e., how safe it is to give money to a particular borrower or offer them credit cards. In foreign countries, however, insurance firms utilise credit scores in determining premiums.

Now, this is an aspect that is not practiced in India currently. That is why currently to put it simply, car insurance premiums and credit scores have no direct relationship.

Further, it is also important to remember that, credit scores in India generally range from 300 to 900 and the higher the score, the better is the credit. On the other hand car insurance premiums are an entirely different category in India. They primarily deal with the automobile sector.

The credit score and insurance relationship

While Indian insurance providers don't use credit scores directly when calculating car insurance premiums, still having a good credit score works indirectly. A good credit history will benefit your overall financial health, and this could lead to favourable loan terms and lower interest on other financial instruments. This maintenance of consistent financial health indirectly determines your capability to pay higher premiums or to take more coverage.

See it is eventually about your creditworthiness. How consistent and honest you are in making payments pending on you along with paying back loans on you diligently. This can be any kind of loan when and if you are faced with hard inquiry for example: Credit card bill payments, phone bills, insurance money etc. How prompt you have been in paying back loans on you defines your credit profile.

How are premiums for car insurance provided?

There are several factors that are diligently followed while deciding and providing car insurance premiums. Some of them are discussed below:

• Type of vehicle and age: A more costly vehicle or a vehicle with larger engines will pay more premium. The age of the vehicle also determines the premium. For example: if a car is causing more pollution, is older than it is bound to have a higher insurance premium.
• Driving history: Good track record while driving can result in lesser premium. For this past vehicle records can be attributed to.
• Location: Costlier locations carry more risk and higher premiums. It is important to read the terms and conditions of your premium carefully, associated costs etc., before applying for the same.
• Insurance coverage type: Third-party coverage offers lesser risks at a lesser premium. This ensures that the risk is distributed proportionately.

Increasing your credit score for good financial health

Indian auto insurance premium does not depend on your credit score, but it is nice to have a good credit score for depicting good health financially. Below are the do's to increase your credit score:

• Pay bills on time: Prompt payment of bills is of paramount importance for a good credit score and preventing you from having a low credit score. That is why try to repay all your pending loans, EMIs etc within the stipulated time.
• Monitor credit reports: Keep an eye out for mistakes or inconsistencies from time to time. Raise issues with your credit rating agency if there are discrepancies so as to maintain a proper credit history. 
• Maintain low credit utilisation: Maintain low credit utilisation at less than 30% of available credit. For example: If you have a credit limit of ₹1 lakhs then do ensure that you never use more than ₹30,000 on this limit so as to ensure that you do not exceed your credit utilisation limit of 30%.

Finally, though credit scores in India do not have a direct impact on car insurance premium, still having a good credit score will improve your financial well-being and could lead to wiser financial handling on other products.