Like it or not, your credit score plays a major role in your financial life, from determining whether you can get a home loan to how much you pay for insurance. But there is a notable exception in Maryland: by law, car insurance companies can’t use a person’s credit score to deny an application, cancel a policy, refuse to renew a policy or increase premiums during a renewal. But they can use an individual’s credit history to assess premiums on any new policies.
Let’s take a closer look at this Maryland law, and what it means for Maryland drivers.
Auto Insurance in Maryland
The first thing you should know is that Maryland’s car insurance rates are about 15% below the national average — about $1,305 per year, as compared to the national average of $1,483, according to Renata Balasco. So even before we take credit rating into account, Maryland drivers are a little better off insurance-wise.
Second, it’s important to know that credit scores are only one of the criteria that insurance companies look at when determining your premium. Other factors include:
- Your driving record
- The model and age of your car
- Whether your car has anti-theft devices installed
- Whether your location is prone to certain natural disasters or has high crime rates
- Your previous history of claims
Insurance premiums can often be brought down by taking steps such as enrolling in a defensive driving course, driving an older and less expensive car, and increasing your deductible.
While looking at all these factors, insurance companies gauge the risk of an expensive claim and adjust accordingly. Higher risk means higher premiums, and lower risk results in lower premiums. According to an FTC study, there is some potential benefit in the use of credit scores to estimate risk, as it offers a more precise degree of accuracy and could potentially allow insurers to grant policies to high-risk drivers who might not otherwise be able to get insurance.
Why is Credit Rating Important?
So why does credit rating play a role in how much you pay for insurance premiums? Because insurance companies consider having poor credit an indicator of financial risk. It may mean you owe serious debts, have trouble paying bills, and have other financial instabilities. Some data has shown that policyholders with financial instability may exaggerate claims to try to get additional funds from their insurer. So, fair or not, having a poor credit rating will affect your claim in states where it’s legal (85% of property and auto insurers).
Opposition to the Use of Credit Ratings
But not everyone agrees about the fine details of this law. Some critics contend that some drivers pay higher premiums than they should. Bills introduced by two Maryland lawmakers, Melissa Wells and Jay Jalisi, would outlaw the use of credit scores in setting any car insurance rates.
Contrary to the report made by the FTC, Wells contends that her constituents “don’t see a legitimate connection between credit scores and driving history,” and that rates have more than doubled in recent years. In addition, it’s been shown that African-Americans and Hispanics tend to have lower credit scores than average, and thus pay disproportionately high premiums for their car insurance.
Another potential advantage Maryland drivers have when it comes to the law: insurers must review a policyholder’s credit every two years, so if your credit improves in that time, you are likely to be offered a better rate. But these Maryland lawmakers are hoping to take credit scores out of the equation altogether, hopefully meaning lower premiums for everyone.
Insurance and Credit Rating in Other States
Maryland isn’t the only state in the nation that limits or prohibits the use of credit rating in determining premiums. For one thing, state regulations usually don’t allow a credit rating to be the sole determiner of a premium — it must include the factors described above.
Some states go even further than that, and place stringent rules on how and when credit rating can be used in the determination of insurance premiums:
- In California, insurance companies can’t use your credit history to determine premiums or the ability to renew (or get) a policy.
- In Hawaii, credit ratings cannot use credit ratings at all when it comes to car insurance, although they can when it comes to homeowners insurance.
- In Massachusetts, insurance companies can’t use credit ratings when it comes to setting rates, offering a new policy, or renewing an existing policy. The same goes for homeowners insurance rates in Massachusetts.
- Michigan law prohibits using credit information to determine rates, deny or cancel a policy, or renew an existing policy.
- In Oregon, the law places limits on what information in your credit report can be used to determine your policy / premiums, and insurance companies also can’t deny an initial application based on credit.