The use of credit scores for insurance purposes has been a controversy for years in Michigan. The debate appeared to be settled in 2010 when the Michigan Supreme Court ruled 4-3 that insurance companies could use credit scores when underwriting insurance policies.

However, one Democratic state representative is trying to protect consumers who don’t have a credit rating from losing out on discounts for their auto insurance. State Rep. Theresa Abed, D-Grand Ledge, has introduced H.B. 4888, which would prohibit insurance companies from using the absence of a credit score or the inability to calculate a credit score when determining the cost of a policyholder’s premium.

Only for discounts

In 2004, then-Gov. Jennifer Granholm proposed a rule that would ban insurance companies from using credit scores when determining rates. Granholm claimed that insurance companies were recouping the cost of discounts offered to some customers for good credit scores by increasing overall base rates. It took five years for the state’s highest court to eventually rule on it.

But industry experts said Abed’s bill, introduced in June and currently in committee, gets around the state’s Supreme Court ruling because it affects only individuals who don’t have a credit report to consider. Abed said the bill was introduced after she was approached at a community event by an elderly couple who had no credit history but complained of higher insurance costs.

Old and young

Some people do not have a credit score because they pay cash for purchases and have never had a credit card or taken out a loan, Abed said. The bill also impacts young people who haven’t had a chance to build a credit report, which Abed said the insurance companies look at as a negative.

“Seniors and other citizens should not be penalized and pay more for insurance because they are careful with their money and live without credit cards and own their homes or their car,” said Rep. Abed. “People who pay their bills and don’t spend more than their income should not be considered risky.”

Staff Aide Judd Herzer didn’t respond to requests for comment via email and messages left with Abed’s staff.

In Michigan, insurance companies can’t deny someone car insurance due to a credit report and can’t take adverse action against someone because they don’t have a credit card account. Legislation passed in 2012 allows insurance companies to increase or decrease insurance rates based on insurance scores.

Good risk indicator

Credit scores have been found to be very good indicators of how likely a driver is to bring a claim, said Lori Conarton, spokeswoman for the Insurance Institute of Michigan, a government affairs and information association that represents more than 90 property/casualty insurance companies.

“It allows the company to more accurately price their products,” Conarton said.

Without credit scores available, high-risk drivers would pay less for car insurance but less-risky drivers would end up paying more, she said.

“It’s only one factor of many that auto insurance companies use to determine your premium,” she said. Other factors include years of driving experience, previous accidents, type of car or home, where you live and drive and whether you have an alarm system.

Tom Gantert is senior capitol correspondent for Michigan Capitol Confidential, a daily news site of the Mackinac Center for Public Policy. A version of this article originally appeared in FIRE Policy News.

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