Credit scores have long been used to determine whether a consumer can secure a loan, rent an apartment, and even gain employment. But the three-digit number is also a factor in the rate an individual will receive for auto insurance. Many individuals and consumer advocates view the measure as an unfair way to judge a person's responsibility and eligibility for goods and services, but a recent decision reveals that the practice may not be changing anytime soon. A state Supreme Court ruling in Michigan comes as a huge upset to those with less-than-perfect credit who may now face higher insurance premiums.
In what has been a legal battle between insurance companies and Governor Jennifer Granholm's administration since 2005, the Supreme Court ruled in favor of the insurance industry, saying that the state lawmakers "exceeded their authority when they banned the practice as discriminatory."
The insurance industry as a whole has long been in favor of using credit scores as a determining factor in assigning rates, contending that individuals with higher credit scores are involved in fewer traffic accidents and submit less claims.
"It is difficult to see how offering discounts to some insureds on the basis of good insurance scores is inconsistent with the [law's] general purpose of availability and affordability of insurance for all consumers," Justice Maura Corrigan wrote in the majority opinion.
Following the decision, Michigan will be removed from the limited amount of states that ban the practice of using credit scores in their determination of insurance rates. Only four states - California, Massachusetts, Hawaii and Maryland - have completely or partially banned the practice, according to the Insurance Journal.
As Congress finalizes President Barack Obama's landmark financial reform bill, the rules involving credit may change to benefit consumers. One provision of the bill will allow individuals who have been turned down for employment or denied a loan based on their credit standing to receive a free copy of their credit score. Consumers may also benefit from obtaining a copy of their credit report each year to ensure that no inaccuracies or errors are present that may be negatively impacting their credit rating.
Those who have low credit scores can slowly improve their standing by making timely, consistent payments and refraining from opening new lines of credit in a short period of time.