Can a single transaction lower your credit score? Explained

Many people, even with many credit instruments, don’t fully understand how credit scores work. While they generally have their basics right, like what the score should look like on average and that they should pay their bills before the deadline, they miss many other important factors that determine their creditworthiness and financial health.

For instance, it’s true that standalone transactions can’t normally lower your credit score. However, several things about some transactions can cause a dip in your score. Let’s understand how:

• Credit utilisation: If that one transaction makes up for over 30%-40% of your total credit limit, your score can temporarily fall. For example, if your total credit limit is ₹1 lakh, and you make a transaction worth ₹45,000, it may cause a 20-30 points drop in your credit score. However, the exact points lost may vary by bureau, your overall credit history, and whether this is a one-off or a pattern.

• Overlimit: This might be obvious, but if that transaction causes you to go over your card limit, it can cause a decline in your credit score. While you can’t make a transaction higher than your sanctioned credit card limit, some banks provide an over-limit facility. However, it typically involves incurring fees.
• Missed payment: If you don’t pay the bill generated by that transaction on time, your score will drop.
• Credit applications: If you make many inquiries for loans or credit applications around the time you make that transaction, the hard queries from those applications can lead to a lower credit score.

However, your credit score can bounce back quickly, usually within a few cycles, if you treat it seriously and ensure that the transaction was a one-time thing. More than the transaction, how you deal with it later has an impact on your credit score. If you repay in full and on time, and keep your credit utilisation low in the future months, your credit score will improve.

Factors that impact your credit score

Here are some factors that can have an impact on your credit score:

The bottom line is, credit cards can be great financial tools if used wisely, but irresponsible behaviour can cause a serious and long-lasting dent in your credit score. Use credit cards to build credit history and manage your finances accordingly by earning rewards and benefitting from the flexibility, but remember to maintain discipline in repayment and credit utilisation.