Credit score can affect insurance rates, court rules

How you handle these could affect your car and house insurance rates. Image from Flickr.

In a Michigan Supreme Court ruling yesterday, insurance companies were given the green light to use one’s credit score as a determining factor for insurance rates. The ruling does not change current insurance company practices. What the ruling does change, though, is the legality of the company pulling a credit report to determine rates.

The credit report insurance rate argument

The argument many insurance companies present to justify using a customer’s financial history to determine rates is simple. Insurance companies say that customers that can get the best personal loan rates also file fewer claims and cost the company less. By giving a good credit break on insurance rates, companies claim to be rewarding customers that cost them less.

The state regulator argument

In 2005, Michigan state regulators tried to ban the credit counseling approach to pricing insurance. The argument is that the practice is discriminatory, especially to customers in lower income brackets. The intent of the law was to create affordable insurance and equal opportunities for all customers.

Supreme Court ruling on credit reports

The Michigan Supreme Court, in the third ruling on this case, declared that the ban exceeded state authority. Michigan law, according to the Supreme Court’s 4-3 ruling, allows the practice of determining insurance rates on credit score. Writing for the majority, Justice Maura Corrigan wrote that “It is difficult to see how offering discounts to some insureds on the basis of good insurance scores is inconsistent with the general purpose of availability and affordability of insurance for all consumers.”

What this means for consumers

What this ruling means for Michigan insurance customers is higher rates for some people. These higher insurance rates are based on a credit score, which may give one more push for customers to explore credit repair. Though credit has not necessarily been shown to be a good indicator of behavior beyond the financial, credit reports are used practically everywhere. Job applications, insurance rates, cell phone plans, even prices on large purchases may be set by someone’s report.