Consumer Credit in Michigan Now Affects Car Insurance Rates

Did you know that your credit score may be used when calculating how much you’ll pay for car insurance quotes? In most states, credit scoring is allowed as a method of determining your overall risk to an insurer. Michigan just joined as number 46 in that group. Only four: California, Massachusetts, Hawaii and Maryland don’t allow some form of credit reporting to be involved in determining your car insurance rate.

The practice is based on the premise that people with higher insurance scores represent a lower risk to insurance companies. Insurance scores are based on consumer credit reports, and involve a lot of derivative math. That is, the credit bureaus create insurance score analyzers that look for things like number of late payments, how much revolving credit versus other forms of credit a consumer holds, and other factors.

The credit bureaus then assign a number, based on that data, which is known as your insurance score. Car insurance companies then use the insurance score along with the raw data from the consumer credit report, and apply their own logarithms to determine your actual rate.

Michigan’s insurance commissioner had banned the practice, believing that it resulted in unfair, discriminatory practices. The Michigan Supreme Court, however sided with the insurance companies, saying that insurers were able to show a “clear correlation between insurance scores and risk of loss” and that insurance scores could be used to establish a “reasonable classification system.”

Consumer credit is only one factor in determining car insurance rates. Insurance companies use a number of elements about each consumer, such as your sex, age, occupation, and where you live, as well as several kinds of vehicle-related information like make, model, and the existence of some safety features, when determining your rates.

Car insurance companies employ an army of statisticians to determine the kinds of factors that contribute to risk. The more accurate their models, the more profitable their businesses will be. By accounting for risk factors when they offer each individual policy, they are able to cover themselves financially and reduce the number and amounts of payments they’ll have to make.

If you are concerned about how your insurance score is used to calculate your car insurance rates, make sure you verify that your consumer credit report is accurate, complete, and error-free.

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