Can You Build Credit with a Debit Card? (2024)

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Do debit cards build credit?

A debit card is a type of banking card that is typically connected to a checking account held at a credit union, bank, or other financial institution. When you open a checking account, you will likely be offered a debit card.

What are debit cards and how do they work?

The difference between a debit card and a credit card is that all purchases made with a debit card will immediately withdraw the funds from the checking account the card is connected to. All purchases made with a credit card are charged to the credit card account and a monthly bill statement is sent to the consumer.

A debit card is convenient to have because it provides you with access to your money at ATMs across the U.S. and around the world. A debit card can also be used like a credit card when making in-store and online purchases.

Because debit cards are connected to a checking account, you’ll need to open an account at the credit union or bank of your choice. After you are approved for the checking account you will be offered a debit card for your account. The debit card is usually sent by mail and arrives at your home within two weeks of opening your checking account.

If you cannot open a checking account due to bad credit or other factors, you may purchase a prepaid debit card. You can buy a prepaid card online or in person at a retail store.

How are credit scores calculated?

The most widely used credit scores are FICO scores, which were developed by Fair Isaac Company, Inc.

FICO uses five categories to calculate credit scores. The importance of these categories will be different for everyone. As the information in your credit report changes, so does the evaluation of these factors in determining your FICO Scores.

The percentages in the parentheses below reflect how important each of the categories is in determining how your FICO Scores is calculated.

Payment history (35%). The most important factor in a FICO Score, payment history keeps track of whether you have been able to meet all your payments on time when payments are due. This can take into consideration your payments on credit cards, mortgage, car loan, student loans, medical bills, and other personal debt. The more consistently you complete your payments, the higher your score will be.

Amounts owed (30%). Having credit card debt doesn’t necessarily mean you are a high-risk borrower with a low FICO Score. However, if you are using a lot of your available credit, this may indicate that you are overextended—and banks can interpret this to mean that you are at a higher risk of defaulting. Amounts owed can also be referred to as “debt burden.”

Length of credit history (15%). Your credit history and age of your accounts contributes to 15% of your credit score. The longer you have had your credit accounts, like a credit card, the better a potential lender is to see how you manage debt. If you've successfully paid your credit card bill each month for several years, lenders will see you are a reliable borrower.

Credit mix (10%). FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each.

New credit (10%). Research shows that new credit applications and opening several credit accounts in a short amount of time represents a greater risk, especially for people who don't have a long credit history.

Your credit score is important because it provides lenders and creditors with information about your ability to repay your debts on time. A low credit score means you may be turned down for an auto loan, mortgage loan, and new credit cards.

How to build and improve your credit score

Make on-time credit card payments. Late credit cards payments will be reported to the credit bureaus, and your credit score will decline.

Use a credit builder loan. Credit builder loans are small loans to build credit that have a term of six to 24 months, with amounts ranging from $300 to $1,000. After you apply and are approved for the loan, the credit union or bank will deposit the full loan amount into an account for you. You’ll make monthly payments over the course of the loan term until the full amount is paid. Upon satisfaction of the loan, the money will be released to you. As you make on-time monthly payments, you build credit because all payments are reported to the credit bureaus.

Become an authorized user. If you can’t qualify for a credit card on your own, becoming an "authorized user” on someone else’s credit card account can help you build your credit score. When you become an authorized user, the card issuer will send the primary card holder a card with your name on it and the account is added to your credit report. Because the primary account holder is the one responsible for paying the charges on the account, the authorized user’s credit score benefits from the cardholder’s on-time payments.

Monitor your credit scores. Your credit payment history is recorded in a report that is maintained by the three major credit bureaus: Equifax®, Experian™, and TransUnion®. Federal law allows everyone to get a free copy of their credit report every 12 months from each credit reporting company. One of the best ways to check your credit score for free is by using annualcreditreport.com.

Use rent-reporting services. Most landlords don't report rent payments to the credit bureaus, but others may use a reporting service. Ask your landlord if they use this service or if they don't, you may request that your rent payments be reported. These services have a fee.

Avoid opening multiple credit accounts back-to-back. Opening several credit accounts in a short amount of time represents a greater risk, especially for people who don't have a long credit history.

Keep credit accounts open. This factor goes together with credit utilization. Keeping your credit card accounts open and not accruing debt on your cards indicates low credit utilization, which can boost your credit score.

Maintain a low credit utilization ratio. According to MyFico.com, using a high percentage of your available credit means you're close to maxing out your credit cards, which can have a negative impact on your FICO Scores. Using a low percentage of your available credit can have a positive impact. In some cases, a low credit utilization ratio will have a more positive impact on your FICO Scores than not using any of your available credit at all.

When to use a debit card vs. credit card

Many people always carry all their credit cards and debit cards with them.

So, how do you know which card to use? Choosing a card you use can depend on various factors:

1. How much money you have available in your account. You shouldn't use a debit card if your account balance is low and may not cover the cost of the purchase.
2. Rewards incentives associated with the card. Many credit unions and banks offer rewards checking accounts that include a rewards debit card, a rewards credit card, or both. Using rewards cards means each time you make a qualifying purchase you earn points or cash rewards.

Using credit cards can help you establish a credit history and build your credit score if you pay the bill on time. As mentioned above, FICO credit scores are calculated based on five factors related to credit, and consumers are rewarded with credit score points for responsible use of credit.

Do debit cards build credit?

Using a debit card doesn't build your credit history or credit score because the money is withdrawn directly from your account and therefore no credit is given, as with a credit card. However, debit cards are designed for easy access to your cash from ATMs and at the register when making purchases. You may also earn rewards for using your debit card for making purchases.

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