Consumers with the highest credit scores borrow money regularly and repay it in a timely manner, according to the website myFICO. A good credit rating saves you money by allowing you to get the lowest interest rates and have the most options when applying for new credit. Only accounts for borrowed money, collections and judgments have a bearing on your scores; therefore, prepaying your car insurance in full does not raise your credit.
Although many auto insurance providers review consumer credit when deciding whether to issue a policy, they do not necessarily report the account's status to credit bureaus. A provider may send the account to a third-party collection agency, which can reflect poorly on the consumer's credit if reported. When collections remain unpaid, the collector may pursue the consumer legally. A lawsuit may result in a judgment, which negatively impacts credit.
According to the Fair Isaac Corporation, which developed the FICO scoring system used my most creditors, payment history accounts for 35 percent of your score. Revolving credit cards, auto and student loans, mortgages, and other installment loans are the types of debt that affect scores. The amount you owe relative to the limit on an account makes up 30 percent of your score. Owing 30 percent or less on any given account improves your score in this category. The length of your credit history accounts for 15 percent, making your oldest, active accounts beneficial to your score. The remaining 20 percent of your score is based on new credit opened and the variety of your debts.
Auto insurance premiums are prepaid services, rather than debts. You pay the premium in advance, usually on a monthly or semiannual basis. Insurance providers typically prefer that you prepay the policy for six months and give you a better rate for doing so. In contrast, they often impose an installment fee for paying monthly. Failing to pay your premium on time or within a specified grace period typically leads to immediate termination of the policy.
You can prepay your auto insurance in full using a credit card or loan funds, which negatively affects your credit at first, because it increases your balance owed. By how much depends on how much of your credit you use. Prepaying six months' worth of auto insurance can cost hundreds or even thousands of dollars, depending on your car and coverage.
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.