In nearly every state, your credit score impacts how much you pay for car insurance.
But according to a new report from insurancequotes.com, it matters more in Michigan than anywhere else.
A hypothetical driver – with the same background and demographic data other than credit score – with fair credit pays 89.6% more than one with excellent credit, the study found. The disparity balloons even more when that driver moves from fair to poor credit – to 229.4 percent.
Though insurance companies question the underlying data and methodologies of some of these studies, similar research seems to back up the outsized impact of credit scores on Michigan car insurance rates, though some of the numbers differ.
A March 2018 study from nerdwallet.com found that Michigan drivers with bad credit pay $5,571 more than drivers with good credit, a larger whole number disparity than in any other state. A 2015 Consumer Reports look at the issue found poor-credit Michigan drivers pay around $3,000 more; again, the highest disparity of any state.
Insurers don’t use major credit bureau scores to determine credit-worthiness. It’s based on much the same information, but uses a different model to determine who’s most likely to file a claim.
The role that non-driving factors such as credit scores play in driving up auto insurance rates in Michigan play into the larger, perennial debate about reforming the state’s auto insurance laws.
That conversation has heated up significantly in the past couple years, largely driven by Detroit Mayor Mike Duggan’s aggressive efforts to change those laws. Duggan and a group of Detroit drivers filed a federal lawsuit over the issue just last week, charging that Michigan’s current no-fault system has made rates unaffordably high.
State Rep. Sherry Gay-Dagnogo, D-Detroit has called on Duggan and other leaders to focus more on addressing the role that non-driving factors play in pushing up rates, especially for Detroit drivers. She says using factors like credit scores and zip codes to determine rates amounts to a discriminatory tax on the poor.
“It’s time to open up the conversation to look at all the factors that create these exorbitant rates,” Gay-Dagnogo said. “Non-driving factors are a great part of it. And [using] credit scores is truly targeting people who are dealing with the impacts of poverty.
“We have to think about people who are locked into the neighborhoods, who are locked into a cycle of poverty, and these issues, these non-driving factors hurt them, and red-lining hurts them.”
But the state’s insurance industry says credit-based scoring doesn’t contribute to the overall high cost of insurance. It defends the practice as a proven way to assess risk, and predict who will file costly claims.
“We’ve found a very strong correlation between these insurance scores, which are based upon your credit record, and insurance loss,” says Peter Kuhnmuench, executive director of the Insurance Alliance of Michigan.
Kuhnmuench says calls to ban the use of non-driving factors like credit in determining rates won’t help most people, and won’t reduce the overall cost of car insurance.
“If you ban the use of credit scoring in Michigan, you haven’t reduced the cost of insurance by one penny,” Kuhnmuench said. “All you’ve done is required better insurance risks to pay more.”
Kuhnmuench could not explain why auto insurance rates seem to be more credit-dependent in Michigan than elsewhere. But he says the conversation around lowering auto insurance rates should focus on three main cost-drivers: going after fraud in the system; setting medical fee schedules for hospitals limiting what they can charge for treating car accident victims; and providing Michigan drivers with lower-cost insurance options with less medical coverage, allowing some to opt out of Michigan’s current unlimited medical coverage for accident victims.
A 2017 Bridge Magazine investigation found that personal injury protection costs are primarily responsible for driving up car insurance rates in Michigan, and that “Motorists in Detroit and much of the metro area – as well as those in the Flint area – are charged substantially more for car insurance because of where they live.”
Reports consistently find that Detroit is the most expensive city in the country to insure a car, costing over $5,000 a year.