Which term describes the practice of charging higher rates to certain consumers based on perceived risk?

The practice of charging higher rates to certain consumers based on perceived risk is known as Risk-based Pricing. This concept involves evaluating the creditworthiness and risk profile of consumers to determine the interest rates or premiums they will be charged. Lenders and insurers assess various factors, such as credit history, financial behavior, and other relevant metrics, to categorize consumers into different risk levels. Those deemed higher risk may be charged more to offset the potential for default or loss. This pricing model allows companies to align their rates more closely with the likelihood of risk associated with individual consumers, thereby managing their financial exposure more effectively.

In contrast, Rate Capping refers to limits imposed on how much a rate can increase over a given period, often used in the context of loans or insurance. Adverse Action relates to notifications sent to consumers when they are denied credit or offered less favorable terms, typically due to their credit report or score. Credit Scoring is the calculation of a numerical score based on an individual’s credit information, which lenders use as part of the risk assessment process but is not directly synonymous with pricing. Therefore, Risk-based Pricing is the most accurate term for the practice of adjusting rates due to perceived risk.