Does Using a Debit Card Affect Your Credit Score?

Credit scores are mysterious three-digit numbers that can have a huge influence on your financial life. As you take out loans and credit cards pay bills, and manage money your credit score goes up and down, determining the interest rates and terms you’ll be offered. With something so important, it’s natural to wonder how every financial decision might impact that score. One common question is whether using a debit card can affect your credit score.

How Credit Scores Are Calculated

Before diving into debit cards specifically, let’s look at what goes into your credit score. The most commonly used credit scores come from FICO and VantageScore, and the exact formula is proprietary. But we know the basic components:

• History of payments: How often and on time you pay your bills This is the most important factor; it accounts for 35% of your FICO score.

• Credit utilization – The ratio of your balance to your total credit limit, across all accounts. This accounts for 30% of your FICO score.

• Your FICO score is based on the length of your credit history, or how long you’ve had credit accounts open.

• New credit – How much new credit you’ve opened recently 10% of your FICO score

• Credit mix – Whether you have different types of credit accounts like credit cards, loans, etc. 10% of your FICO score.

Your credit scores are calculated based on the information in your credit reports from the three major credit bureaus – Experian, Equifax, and TransUnion.

How Debit Cards Are Different From Credit Cards

Before you can tell if debit cards hurt your credit, you need to know how debit cards are different from credit cards:

• Debit cards draw money directly from your checking account. There’s no borrowing or credit involved.

• You can borrow up to a certain amount of money with a credit card. You have to pay it back later.

• Debit card activity does not get reported to the credit bureaus and does not impact your credit reports or scores.

• Credit card activity is regularly reported and factors into your credit utilization and payment history.

So right off the bat, we can deduce that using a debit card will not directly affect your credit score. Let’s explore a bit further.

Do Debit Card Transactions Appear on Credit Reports?

When you use your debit card to make purchases or withdraw cash, those transactions do not show up on your credit reports. The three major credit bureaus – Experian, Equifax, and TransUnion – only collect information on credit accounts like credit cards, loans, mortgages, etc. Your checking account and debit card activity are not reported.

The one exception is if you overdraft your checking account, resulting in a negative balance. If the bank extends this credit to you, the overdraft may be reported to the credit bureaus as a loan. Too many overdrafts can negatively impact your credit score.

Otherwise, no matter how frequently you use your debit card, that activity remains invisible to the credit bureaus.

Are There Any Debit Cards That Build Credit?

Traditional debit cards from major banks and financial institutions do not build your credit. But there are some new debit card options specifically designed to help improve credit scores:

• Credit builder debit cards – These function like secured credit cards, requiring an upfront deposit that becomes your credit limit. On-time payments are reported to credit bureaus.

• Bank account credit reporting – Some financial technology apps can report your bank account activity and bill payments to credit bureaus when linked to your checking account.

• Debit-credit hybrids – A few debit cards report your activity to credit bureaus as if it were a credit card purchase, helping build your credit history.

However, these non-traditional debit card options represent a very small portion of the overall debit card market currently. Most standard debit cards issued by banks are not credit builders and do not get reported to credit bureaus in any way.

Could Only Having a Debit Card Hurt Your Credit?

While using debit cards won’t directly affect your credit, having one as your only form of payment can potentially impact your credit indirectly:

• No credit history – With only a debit card, you won’t build any kind of credit history, payment history, or credit mix that lenders want to see. This can make getting approved for credit difficult.

• Pre-qualification – Many lenders won’t even let you pre-qualify or pre-approve for credit cards and loans without an existing credit score.

• Higher deposit requirements – You may have to put down larger deposits for utilities, cell phone service, or rentals without established credit history.

• Higher interest rates – Being new to credit often means paying higher interest rates once approved, since lenders view you as higher risk.

So while debit cards themselves don’t influence credit scores, only having a debit card and no credit cards can potentially make building credit more challenging.

Tips for Using Debit Cards Without Hurting Your Credit

If you rely on debit cards for most purchases, you’ll want to be cautious to avoid indirect credit score damage:

• Avoid overdrafting your checking account. Overdraft fees and negative balances reported to credit bureaus can lower your scores.

• Open a secured credit card if you don’t qualify for an unsecured card, using your savings as a deposit to build credit history.

• Become an authorized user on someone else’s credit card account to benefit from their credit history.

• Sign up for debit cards or bank accounts that report your activity to credit bureaus to start building history.

• Ask utility companies, cell providers, rental agencies to do credit checks instead of deposits.

• Apply for credit pre-approval to see if you may qualify for cards even without credit history yet.

The Impact of Debit Cards on Your Credit

While debit cards themselves don’t influence your credit scores, it’s important to understand their indirect effects on your overall credit health. Maintaining both a debit card and a credit card lets you enjoy the benefits of each while building your credit history and keeping credit utilization low. Check your own credit reports regularly to be aware of any reporting gaps and your progress. Understanding the role of debit cards is one step toward financial wellness.