Do Debit Cards Build Credit?

Traditionally, no — debit cards don’t help you build credit because, unlike a credit card through which you borrow money that you need to pay back, a debit card uses the money you do have from your own bank account.

Because your credit score and credit report give lenders insight into how you’ve handled paying debt in the past, simply using your own money to pay for things doesn’t demonstrate how you manage debt.

This article explains why you cannot build credit with a traditional debit card, when to use a debit card, ways to build credit and how to establish good credit habits.

Why debit cards typically don’t build credit

Even if you’re using your debit card responsibly, your purchases don’t normally help you build credit — you’re using your own money directly from your bank account to cover the cost. When you use a credit card, you’re borrowing money from a lender via a line of credit to pay for your purchase.

Because the lender is paying for the cost upfront, you’re responsible for paying back the amount you borrow. Each time you make an on-time payment on your credit card account, you’re showing that you pay back what you borrow. That’s why payment history makes up 35% of your FICO® credit score.^[1]

Similar to debit cards, prepaid debit cards don’t help you build credit. With prepaid cards, you load money onto the card and continue loading money as you need it. You have no payments to make, so nothing gets reported to the bureaus.^[2]

Ways to build credit

You can use several credit-building strategies to strengthen or establish your credit history:

• Fix errors on your credit report. A great way to start is to assess your credit health by checking your credit report. You can check your credit report as often as you like without negatively affecting your credit score. Credit bureaus and credit scoring companies like FICO® recommend checking your credit report at least once a year. Checking more frequently may be better, because it’s easier to spot and address any errors or inaccuracies in your credit history that could be weighing your credit score down.^[3]
• Ask to be an authorized user. Becoming an authorized user on someone else’s credit card, if they have positive payment history, have had the account open for some time and maintain a low credit utilization ratio (CUR; their total balance divided by their total credit limit on the account), can help improve your credit score if their credit card company reports an authorized user on that account.^{[3] [4]}
• Have monthly payments for rent and utilities reported. If you make on-time monthly payments for your rent and utilities, why not be rewarded for them? You may be able to have rent, including past payment history, counted in your credit score by using a rent reporting service like Self, which has a relationship to all three major credit bureaus, Experian, Equifax and TransUnion.
• Open a secured credit card: A secured credit card can build credit similarly to an unsecured credit card — making on-time monthly payments demonstrates to lenders that you’re responsible with the money you borrow. With a secured credit card, you make a cash security deposit that is held in a certificate of deposit (CD) or savings account to secure the account. This deposit usually determines your credit limit. Then you use the card to make purchases and make monthly payments to the creditor. Your payments get reported to the credit bureaus to help you build credit.
• Take out a credit builder loan. A credit builder loan, like the Credit Builder Account (CBA), is a loan that enables you to build savings as well as credit, but it works differently than traditional installment loans, such as student loans or mortgages. Instead of getting your lump sum when you sign your agreement and paying it back in installments, you make your monthly payments, which are put into a certificate of deposit (CD) or savings account, and you get your lump sum (minus interest and fees) as soon as all of your payments are made. Additionally, your payments get reported to the credit bureaus., helping you establish a payment history.
• Set up automatic payments to make on-time payments. Payment history is the most important factor of your FICO® credit score, making up 35% of your score. So it’s very important to make your monthly payments on time.^[1] Even one late payment can hurt your credit score. Setting up automatic payments to your credit accounts from your bank account each month means you’re less likely to forget your due dates when they come around. Just be sure you have enough money in your account when the payment is due so that your payment isn’t returned, which could result in overdraft fees.

How to use my debit card to build good credit habits

Even though you can’t build credit using a traditional debit card, a debit card is still great for training yourself to build good credit habits.

Start working on these good habits before you apply for a credit card or secured card:

• Spend within your means. It can be hard to spend within your means with a credit card, especially when your credit limit is high. Debit cards encourage you to spend only what you have in your bank account, or less, to avoid overdraft fees. Getting used to keeping your spending within your actual budget helps prevent you from spending more than you can repay.
• Budget and track your spending. Budgeting and tracking your spending allows you to visualize what you spend your money on — including where you could be overspending. Having a good sense of your budget and what you can afford in a given month helps prepare you for using credit responsibly.
• Set up scheduled bill payments. Scheduled or automatic bill payments are a great tool for making your monthly payments on time. If you get into the habit of scheduling repeat payments like rent and utilities, you can easily translate that to automating your monthly credit card payment by the due date. Just be sure to have enough money in your bank account for when the payment is scheduled.

When should I use a debit card?

You may find times when it makes more sense to use a debit card over a credit card. A few examples include:

• If you’re worried about overspending: Because debit cards use your own money from your bank account, it’s harder to overspend. A credit card, on the other hand, could have a credit limit much higher than the amount of money you actually have.
• If you need to access cash quickly: Using your debit card at an ATM allows you to take cash out quickly without paying cash advance fees and interest like you would with a credit card.
• If you want to avoid merchant fees: Some merchants charge their customers additional transaction fees, or surcharges, for using a credit card, so using a debit card can help you avoid these fees.^[5]

How can I improve my credit with a credit card?

When used responsibly, a credit card can help you build or improve your credit, provided you:

• Make all payments on time. Remember, payment history makes up 35% of your FICO® credit score calculation. Making on-time monthly payments across your credit cards, loans and other credit accounts is a huge help in building or improving your credit because it helps you establish a positive payment history.^[1]
• Keep your credit utilization ratio (CUR) low. Your CUR refers to your total revolving debt divided by your total revolving credit limits. Experts suggest maintaining a credit utilization ratio below 30% but add that staying close to 10% offers the best chance at adding a positive impact to your credit score.^[6]
• Pay over the minimum payment. Paying more than your minimum payment due each month may not only help you avoid carrying an account balance on your credit card, but may also help reduce your overall debt and possible interest charges. You could both save money on interest and possibly improve your credit score by reducing your amounts owed.^[4]

When should I use a credit card?

In certain situations, you may need to use a credit card over a debit card. Some common ones include:

• If your debit card doesn’t have a rewards program: Some credit cards offer perks on certain purchases, meaning you could get rewards points that you redeem for airline miles, gift cards or credit towards your account balance. So everyday purchases you make like gas and groceries could benefit you if you have a rewards credit card. A debit card may not have a rewards program or may be in different purchasing categories than what your credit card offers. Be sure to compare the rewards programs available to you from the credit card issuer to make sure you’re getting the most out of your purchases.
• If you’re making a big purchase: Sometimes you may find yourself in a position where you need more money than you do have to make a large purchase. A credit card can help you make that large purchase, or an emergency purchase, and may offer purchase protection and warranties on these purchases. Just develop a plan to pay it back over a specified period of time so that you avoid accruing a great deal of interest on the purchase.
• If you want to build your credit: Using a credit card responsibly by spending within your limit and making on-time payments may help you build your credit and better your credit score.^[1]

Build credit on your terms

While a traditional debit card doesn’t directly help you build credit, it can help you learn good financial habits that will help you use your credit responsibly. And there are many other options for using credit, like Self’s secured credit card, the Self VISA® Credit Card.

To qualify for the Self VISA® Credit Card, you need to establish a Credit Builder Account with Self, which can help you start building credit. Self’s Credit Builder Account, for example, lets you choose from four plans so you can determine which one works best for your budget.

In all, while building credit when you have bad credit or no credit history can seem like an intimidating task, Self offers tools to help you get on the right track with your personal finances.

Disclaimer: FICO is a registered trademark of Fair Issac Corporation in the United States and other countries.

Sources

1. FICO®. “How Payment History Impacts Your Credit Score,” https://www.myfico.com/credit-education/credit-scores/payment-history. Accessed August 7, 2022.
2. Experian. “Secured Card or Prepaid Card: Which Card Is Best For You?” https://www.experian.com/blogs/ask-experian/secured-card-or-prepaid-card-which-credit-card-is-best-for-you/. Accessed, August 7, 2022.
3. FICO®. “How to Build Credit,” https://www.myfico.com/credit-education/credit-scores/how-to-build-credit. Accessed August 7, 2022.
4. FICO®. “How Owing Money Can Impact Your Credit Score,” https://www.myfico.com/credit-education/credit-scores/amount-of-debt. Accessed August 7, 2022.
5. FICO®. “What to Know About Credit Card Surcharges,” https://www.myfico.com/credit-education/blog/credit-card-surcharges. Accessed August 7, 2022.
6. FICO®. “What Should My Credit Utilization Ratio Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be. Accessed November 17, 2022.

About the author

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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