In many states, it is illegal for insurance companies to use your credit scores to determine how much you pay for auto insurance. But if you are unlucky enough to live in a state where this is legal, and where insurance companies can use credit scoring, then there are some important things you need to know to protect yourself against abuse and misuse of your credit score.
First, the bad news. A lower credit score will mean higher insurance premiums.
The good news is, there are some things you can do to protect yourself. Here are our top 7 things to know about how auto insurance companies can and will use your credit scores and credit information.
1. Insurance credit scoring affects the price of your auto insurance.
According to the law, “Insurance score” is defined as “a number or rating … based… on credit information for the purposes of predicting the future insurance loss exposure of an individual applicant or insured.” (Senate Bill 300; Public Act 165 of 2012; MCL 500.2151(e))
2. Using credit scores to determine auto insurance rates is legal in many states, including Michigan.
In 2010, the Michigan Supreme Court ruled that: “[i]nsurance scoring is permissible under the Insurance Code” in its Insurance Institute of Michigan, et al., v. Commissioner, Financial & Insurance Services, Department of Labor & Economic Growth opinion.
3. Michigan auto insurance companies have limits on using a person’s credit information.
A Michigan auto insurance company can’t use a person’s credit score to refuse coverage or refuse to renew existing coverage, according to House Bill 4594; Public Act 206 of 2012; MCL 500.2153.
4. Previous credit history inquiries can’t hurt your “insurance score.”
Insurers are prohibited from using any of the following as a negative factor in calculating an insurance score, according to House Bill 4594; Public Act 206 of 2012; MCL 500.2153(g)).
- Credit inquiries not initiated by the consumer;
- Credit inquiries relating to auto insurance coverage;
- Multiple lender inquiries from the home or auto lending industry;
- Collection accounts with a medical industry code.
5. You can request to be re-rated if your credit score improves or changes, or if it’s based on erroneous information.
At the time of your auto insurance policy’s annual renewal or during another time in your 12-month policy (but not more than once in a year), “… an insured person has the right to request to obtain a new credit report or insurance score and rerate the insured.” The auto insurance company must also oblige, according to House Bill 4594; Public Act 206 of 2012; MCL 500.2153(f)).
If your credit score is based on erroneous information, you must challenge it and have the insurance company determined it to be “incorrect or incomplete.” Then the the insurer shall reevaluate the insured within 30 days of receiving … notice [of the determination],” according to House Bill 4596; Public Act 208 of 2012; MCL 500.2157.
6. If you have a poor credit score caused by circumstances beyond your control, there are exceptions.
When circumstances beyond your control damage your credit information or score, you can request that an auto insurance company make an exception to its insurance scoring policy under any of the following events, according to House Bill 4595; Public Act 207 of 2012; MCL 500.2154(1)):
- Identity theft.
- A catastrophic event, as declared by the federal or state government.
- Serious illness or injury, including to an immediate family member.
- Death of a spouse, child or parent.
- Overseas military deployment.
- Divorce or involuntary interruption of legally owed alimony or support payments.
- Temporary loss of employment for 3 months or more, if it results from involuntary termination.
- Predatory lending resulting in the foreclosure of (or the beginning of an action to foreclose) a mortgage of real property owned by the insured person or insurance applicant.
- Other events, as determined by the insurer.
7. Did they tell you?
In many states, auto insurance companies must let people know they’re using credit scoring to determine rates.
For example, in Michigan an insurer is required to disclose that it uses “credit information” or a “credit-based insurance score” in determining the price it will charge for auto insurance.