Your credit score plays a significant role in determining whether you qualify for a loan or credit card. It also influences the interest rates, credit limits, and repayment terms that lenders may offer.

While many people associate credit scores only with loan repayments, several types of financial transactions can either improve or lower your score. Understanding which transactions affect your credit score can help you build a strong credit history and make better financial decisions.

In this article, we'll explain the financial transactions that impact your credit score, how they affect your credit profile, and tips to maintain a healthy score.

What Is a Credit Score?

A credit score is a three-digit number, usually ranging from 300 to 900, that reflects how responsibly you've managed borrowed money in the past.

Credit bureaus calculate this score using information provided by banks, NBFCs, and other financial institutions. Lenders use your score to evaluate the risk of lending to you.

Generally:

• 750 and above: Good to excellent

• 700–749: Fair to good

• 650–699: Average

• Below 650: May make loan approvals more challenging

10 Types of Financial Transactions That Affect Credit Score

While credit agencies don’t go over every detail of purchases you make with credit cards, electronic transfers or personal loans, they may use computer algorithms to determine spending and payment patterns. If you’re seen as a high-risk individual, lenders may not agree to lend you money, or it may be at higher interest rates.

Here are 10 examples of transactions that could have an impact on your credit history and CIBIL score:

1. Large Purchases – Buying something very expensive on a loan, like a home or a car, will definitely go on your credit report.

2. Late Payments – A history of defaulting on payments for utilities, credit card bills, and other dues does not reflect well on your credit report.

3. Multiple Loans – Applying for too many credit cards and small loans at one time is seen as a risk factor, especially if you already have one or more.

4. Cash Withdrawals – Frequently using your credit card to withdraw cash hints at money troubles, in addition to incurring very high interest rates.

5. High-Risk Signals – Heavy spending on driving tickets or ‘challans’, alcohol, porn, lottery tickets, counselling/therapy, etc. can all make you seem high-risk.

6. High Credit Utilisation Ratio – The credit utilisation ratio is a ratio of your outstanding credit balances to the borrowing limit. If your credit utilisation ratio is not below 30%, it can negatively impact your credit score.

7. Any Outstanding Debt – Even a small amount of outstanding debt reflects poorly on your credit report and may reduce some points of your credit score.

8. Paying Only the Minimum Amount Due – If you only pay the minimum amount due, you are at the risk of falling into a debt trap. The debt gets rolled over and interest piles up on the outstanding balance. You not only lose money but also lose some of your credit score points.

9. Requesting for a borrowing limit Increase Too Often – Frequently requesting for an increase in the borrowing limit affects your credit score negatively. Because every time you make a request, the bank pulls up your credit report. This inquiry is registered as a hard inquiry capable of harming your credit score.

10. Not Having a Credit Mix – A healthy balance of secured loans like home loans and unsecured loans like personal loans indicates that you have a good experience of handling multiple types of credit accounts.

Even if you don’t want a loan or credit card right now, you may need it in the future, so ensure you are using credit wisely. If you have a low credit score or none at all, you could still get a personal loan through Freo. Now only does this help you access small loans for your financial needs, but also start building your credit history for the future.