Everyone knows you need good credit when it comes to taking out a home mortgage, a loan, or even your next-door neighbor that you've been trying to impress for a long time. But did you know that it can also affect how much you pay for your car insurance?

If you didn't, then you're not alone. Studies show that many Filipinos are clueless when it comes to their credit score and history. Not surprisingly, they're left wondering why their car insurance rate is so much higher compared to other people they know.

What is a credit score?

A credit score is a numerical figure that shows your credit report at a given time. It looks into your financial health, and predicts if you will become 90 or more days delinquent in paying any credit line (credit cards, but also your personal, home or auto loans) over the next 12 months.

Factors that affect negatively affect your credit score

  • Cancelled credit cards with unsettled balance
  • Unpaid debts or loans.
  • Declared bankruptcy in court, or other court judgments that are linked to credit transactions.
  • Late or overdue payments on loans and credit card bills
  • Bounced checks.
  • Foreclosed properties or homes

If you are categorized as a negative credit risk, then you're "blacklisted" by all banks as someone “not creditworthy”. When this happens, then they won't hesitate to decline your loan application.

Where and how to check your credit score

Most credit scores are not released publicly, but you can visit Credit Management Association of the Philippines for your inquiries http://www.cmaphil.com/portal/ContactUs.aspx

What is a credit report?

Your credit report, on the other hand, is a statement that shows your credit activity and performance. If you're confused between a credit score and credit report, just remember that your credit score is a representation of your credit risk based on your credit report at a specific time.

Lenders use your past payment transactions to assess if you are a “good credit risk" or a low-risk borrower candidate, or someone who will be able to consistently pay off your debt for the entire duration of your loan.

A “bad credit risk” or a "high-risk borrower" will most likely be unable to repay back their loans on time. They are the ones whose credit card or loan applications get denied time and time again.

Car loan rejection

Your credit report includes:

  • Personal information, such as educational background, employment history, credit card usage, and other data.
  • Government-issued identification number and other consumer ID information.
  • Bill payment records with credit subscribers.
  • Public records such as court judgments, tax liens, bankruptcies, etc.
  • List of companies who inquired about your credit history.

Companies who can access your credit history include finance institutions, banks, and credit card companies. It may also include companies who are extending your credit. Every lender who checks your credit history has their own standard criteria and procedures when it comes to granting- or rejecting- your loan or credit application.

In 2008, the Republic Act 9510, or Credit Information System, was enacted as a centralized credit information system in the country. It created the Credit Information Corp (CIC), and serves as the agency that holds a universally-accessible, credit report information of all Filipinos. It has become fully-operational this year (2016).

How does a bad credit score and credit report affect your car insurance? Your credit score and credit report may not be a reflection of who you are as a person, but they certainly show car insurance companies your "statistical" likelihood of getting into an accident. Sounds harsh, but it’s true.

Auto insurance companies claim that a person with a bad credit score has a 40% greater possibility of getting into an accident, while those with higher credit scores are less likely to experience a collision. It's also estimated that people with bad credit scores pay 20% to 50% more for insurance than those with good credit.

So what it means is that car insurance companies use your credit scores to set your down payment and premium rates, or the amount of money you'll pay for your vehicle each month. They'll also use your credit report to assess your patterns and paying habits, but your credit score lends a heavier weight when they decide which car insurance rate to give you.

What are credit score ratings?

The Credit Management Association of the Philippines, which is also known as CMAP, has a list of credit score ratings that you can use as a guideline:

  • Excellent Credit – 750-850
  • Good Credit – 660-749
  • Fair Credit – 620-659
  • Bad/Poor Credit – 350-619
  • No Credit – 0-0

Obviously, the higher your score, the better your credit is. This translates to lesser car insurance rates and down payment. Most car insurance companies consider a 600-650 credit score as "good credit", so if you fall under this area, then you're quite safe. If it’s below than that, then you should start repairing your credit ASAP.

How to repair your credit score

There’s this big pink elephant in the room that’s been dying to express itself here, and it might be yours too. So we’ll bring this topic up to ease your suffering: how do you repair your credit? Simple- by making sure that your credit score goes from Fair to Excellent.

Easier said than done, though. Allow us to warn you that it won't be easy. The truth is that you can never repair a bad credit history, since it's permanently there in your record and won’t go away. It’s like your in-laws from hell, or a healed scar that still itches from time to time. The best thing to do is to make amends by paying off your dues as soon as possible.

Note that even if you’ve paid off your debts in full, chances are you still might get declined. It may take you 2-3 years (for CIC standards) and even 7 years (for CMAP standards) for most banks and finance institutions to wipe the slate clean and give you their sweet “yes”.

Fortunately, most auto insurance companies are more forgiving than banks. If your credit score is high and your credit report shows consistent and on-time payments for a long time, then they might be more open to lowering your premium rates.

The best thing you can do is to ask around and weigh your options. And don’t be scared to negotiate with them. Show them how good you were in paying off all your debts and maintaining good credit. That way, you get the best possible car insurance rate while enjoying your vehicle at the same time.