Do Pending Transactions Affect Credit Score?

Many individuals wonder if pending transactions, those still processing, influence their credit score. Understanding how credit scores are calculated and how credit card transactions are processed provides clarity. This article aims to demystify the relationship between pending transactions and credit scores.

Understanding Pending Transactions

A pending transaction refers to a financial charge or purchase that has been authorized but has not yet been fully processed and posted to an account. When a credit card is used, the merchant’s system sends a request for authorization to the card issuer. This initial step verifies the card’s validity and that sufficient credit is available, leading to a temporary hold on funds or a reduction in available credit.

This temporary status means the money has been committed for a specific purchase, but it is still in transit between accounts. For instance, when paying at a gas pump or adding a tip at a restaurant, the initial authorization might be for an estimated amount, with the final charge only settling later. Online purchases may also remain pending until the order ships.

The transition from pending to posted involves a multi-step process. After authorization, the merchant typically submits a batch of authorized transactions to their acquiring bank. Settlement occurs when funds are transferred from the cardholder’s account to the merchant’s account, a process that can take one to three business days.

The Effect on Credit Scores

Pending transactions do not impact credit scores. Credit bureaus, the entities responsible for compiling credit reports, only receive and process information once transactions have been finalized and “posted” by the financial institution. Until a transaction is fully settled and appears on a monthly statement, it is not reported to these bureaus.

While a pending transaction does not affect your credit score, it can temporarily reduce your available credit. For example, if a card has a $1,000 limit and a $400 purchase is pending, the available credit for new transactions decreases to $600. This temporary reduction in available credit is distinct from the credit utilization ratio reported to credit bureaus, which is based on posted balances.

Key Credit Score Factors

Since pending transactions do not influence credit scores, it is important to understand the factors that do. Credit scores, such as FICO and VantageScore, are based on information within credit reports. These reports compile data from lenders and creditors, including account types, payment history, and credit limits.

Payment history is often considered the most impactful factor, typically accounting for 35% to 40% of a FICO or VantageScore. Consistently making payments on time demonstrates responsible financial behavior and contributes positively to credit scores. Even a single payment 30 days or more overdue can significantly harm scores and remain on a credit report for up to seven years.

Credit utilization, or the amount of credit used relative to the total available credit, is another significant factor, making up about 30% of a FICO Score. A lower utilization ratio indicates less reliance on borrowed funds and is viewed favorably by lenders. Keeping credit card balances well below credit limits, with a common recommendation to stay under 30% utilization, can help maintain a healthy score.

The length of one’s credit history also plays a role, accounting for approximately 15% of a FICO Score. This factor considers the age of the oldest account, the newest account, and the average age of all accounts. A longer history of responsibly managed credit accounts has a positive effect.

New credit, representing recent credit applications and newly opened accounts, typically accounts for about 10% of a credit score. While applying for new credit can result in a “hard inquiry” that may cause a small, temporary dip in scores, this impact is usually minimal and fades over time. Multiple inquiries in a short period, especially for credit cards, can signal higher risk.

Finally, credit mix, or the diversity of credit accounts, contributes around 10% to a FICO Score. This involves having a combination of revolving credit, like credit cards, and installment loans, such as mortgages or auto loans. Demonstrating the ability to manage different types of credit responsibly can be beneficial, though it is not necessary to open new accounts solely to diversify.