Credit Risk Modeling and Risk-Based Pricing

As the payments industry continues to evolve, the need for credit risk modeling and risk-based pricing is becoming increasingly vital. The global credit risk market is currently valued at approximately $9.5 billion and is projected to reach $23.9 billion by 2032.¹

Within the credit card space, credit risk modeling and risk-based pricing enable financial institutions (FIs) to assess an applicant’s risk and implement tiered pricing,² helping them maintain financial stability, serve a broader cardholder base, and prevent potential revenue loss due to declines or charge offs. Simultaneously, qualified card applicants benefit from the higher approval rates and better prices, helping to create a win-win situation for both the FI and their cardholders.³

How Does Credit Risk Modeling Inform Risk-Based Pricing?

Credit risk modeling and risk-based pricing are complementary; the former assesses a prospective cardholder’s likelihood of default by analyzing credit profile factors – such as credit history and payment behavior. While the latter uses this assessment to set interest rates that reflect the cardholder’s risk level.

• Credit risk modeling: FIs can leverage credit risk modeling tools to analyze probability of default and determine the creditworthiness of a potential cardholder, enabling them to develop a credit score and make informed lending decisions.¹ This typically involves analyzing borrower data such as in-house application scores, credit history, and credit scores (from the risk models) to assign a cardholder’s risk tier.⁴ Furthermore, FIs can continuously leverage these risk tiers to dynamically adjust pricing, initial credit limit, and underwriting criteria, optimizing potential revenue and reducing possible credit loss.
• Risk-based pricing: Based on these risk tiers, FIs can potentially apply higher APRs to subprime borrowers to offset default risks and offer lower rates to more creditworthy cardholders.⁵ FIs can leverage segmented risk-based pricing to optimize approval rates and profitability across all risk tiers.

Example Risk Assessment

Processors such as TransFund offer resources and expertise to help FIs effectively manage credit risk and implement risk-based pricing strategies. TransFund provides various delinquency reports to help clients analyze the credit risk profile of their cardholders and make decisions about setting appropriate cardholder rates.

Benefits of Credit Risk Modeling and Risk-Based Pricing

FIs can leverage credit risk modeling and risk-based pricing to responsibly grow their portfolios and balance risk across all cardholder segments. Credit risk modeling and risk-based pricing benefits range from increased fairness to offsetting costs of potential losses and risks.

• Increased approval rates: Credit risk modeling distinguishes high-risk applicants from low-risk ones, enabling FIs to approve more qualified applicants with better margins to better offset potential future losses from high-risk individuals.
• Fairness and risk mitigation: Risk-based pricing ensures borrowers pay rates that accurately reflect their credit risk, moving beyond rigid single pricing models, which often cause adverse selection of risky applicants.⁵ By approving higher-risk applicants at appropriately priced rates, FIs can responsibly expand access to credit.
• Financial inclusion: Risk-based pricing enables FIs to responsibly approve riskier applicants who might otherwise be denied. By offering fair rates aligned to individual risk profiles, this approach expands access to credit at fair fees and helps bring underserved individuals into the formal financial system, an especially important goal for community institutions.
• Competitiveness: Attracting prime borrowers with competitive low-risk pricing strengthens portfolio quality and creates a flexible segmented risk-tiered option that helps retain cardholders who might otherwise seek alternative lenders.
• Offset costs: Risk-based pricing can help offset the potential costs that higher risk borrowers can create by allowing higher rates for high-risk segments. This compensates for the additional risk and helps FIs offset potential defaults, creating a more sustainable lending model.⁶

Challenges of Credit Risk Modeling and Risk-Based Pricing

Although FIs can leverage risk-based pricing to improve fairness and competitiveness of lending models, FIs should also consider potential challenges:

• Operationalization: Effective credit risk modeling and risk-based pricing require transparency, robust data quality, and adaptation to market/regulatory conditions.⁷ When implementing credit risk modeling and risk-based pricing, FIs should prioritize transparent communication and clear APR disclosures to potential cardholders.
• Economic volatility: Market volatility, inflation, cost of funding, and changing borrower behavior complicate long-term rate-setting strategies. As credit card delinquencies and charge-offs continue to rise, lenders must continuously review and potentially adjust credit risk and pricing models to reflect shifting trends.⁶

Conclusion

Integrating advanced credit risk models alongside agile risk-based pricing strategies is essential for FIs to thrive in today’s dynamic payment ecosystem. By adopting these strategies, FIs can boost their competitiveness, expand their cardholder base, and drive sustainable growth while managing risk exposure. Partners such as TransFund support credit risk modeling and risk-based pricing strategies by equipping FIs with expertise, portfolio reporting, and other resources that enable more confident, data-driven credit decisions.

Interested in a partnership with TransFund? Click here to connect with us.

Sources:

1. Coherent Market Insights, Credit Risk Assessment Market Size and Share Analysis, 2025
2. Investopedia, Risk-Based Pricing: What is Means, How it Works, 2020
3. Experian, What Is Risk-Based Pricing?, 2024
4. SoFi, What Is Risk-Based Pricing?, 2024
5. Center for Capital Markets, The Economic Benefits of Risk-Based Pricing, 2021
6. Deloitte, 2025 Banking and Capital Market Outlook, 2024
7. Anaptyss, Credit Risk Managements in Banking: Challenges and Solutions, 2025