Credit scores are used, to some extent, in almost every facet of life in the US. They are used to determine the interest rate on your credit card, auto loan, and mortgage. They are also used to determine eligibility for many jobs, as well as many apartments or rented homes. In addition, credit scores may also be used to determine your insurance rates.

Insurance companies began using credit scores to determine insurance eligibility and premiums after a high correlation was found between lower credit scores and a higher incidence of accidents and claims in general. However, some states argued that the use of credit scores by insurers was unjust. A new case of precedence may change all that.

The Michigan Supreme Court ruled that insurance companies are no longer banned from using credit scoring; the vote was 4-3, which means that the ruling is permanent. The ruling means that a person in the State of Michigan can be denied insurance, be it home or auto, or be assessed a surcharge for their credit score. The Court found that “insurers have shown a clear correlation between insurance scores and risk of loss and demonstrated that insurance scoring may be used to establish a ‘reasonable classification system.’” The Court concluded that, as such, “the use of credit scoring does not result in rates that are unfairly discriminatory.”

While most states (46) do allow insurance scoring, most of these (26) use a system developed by the National Association of Insurance Commissioners (NAIC) that is a credit-based scoring system. Michigan sets a precedent of allowing the use of credit scores taken in the same form as a lender or credit provider would.

According to David Snyder, Vice President and Associate General Counsel of the American Insurance Association, “In reality, the majority of consumers benefit from the use of insurance scoring through lower insurance rates. Insurance scoring is highly predictive of risk and helps increase the availability of insurance products because this tool enables insurers to accurately write virtually any risk.”

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