Do Debit Cards Build Credit? Here’s What You Need to Know

Many individuals wonder if using their debit card can help them build a credit history. This is a common misconception, as debit cards operate fundamentally differently from credit products. This article will clarify why debit cards do not contribute to credit building and what truly impacts your creditworthiness.

How Debit Cards Function

A debit card provides direct access to the money in your checking account. When you use a debit card for a purchase, the funds are immediately deducted or placed on hold from your available balance. This means you are spending your own money, not borrowing funds from a financial institution.

Because debit card transactions involve your own deposited funds rather than borrowed credit, they are not reported to the major credit bureaus such as Experian, Equifax, or TransUnion. This lack of reporting is the primary reason why debit card use, even responsible spending, does not appear on your credit report and therefore does not influence your credit score.

Principles of Credit Building

Credit scores, such as FICO Scores and VantageScores, are numerical representations of your creditworthiness. These scores are calculated based on information in your credit reports, which document your history of borrowing and repaying money. Lenders use these scores to assess the risk of lending money to you.

Several factors determine your credit score. Payment history is influential, accounting for approximately 35% of a FICO Score, reflecting whether you pay bills on time. Credit utilization, or the amount of credit you are using compared to your total available credit, is also influential, making up about 30% of your FICO Score; keeping this ratio low, below 30% is advisable. The length of your credit history, new credit applications, and the mix of different credit types (like credit cards, installment loans, and mortgages) also contribute to your score, though with varying weights depending on the scoring model.

Strategies for Establishing Credit

To establish or improve your credit history, you need to engage with financial products that involve borrowing and repayment, which are then reported to credit bureaus. Secured credit cards are a common starting point for those with limited or no credit history. These cards require a cash deposit, often between $200 to $500, which sets your credit limit and acts as collateral for the issuer. Responsible use, including making on-time payments and keeping your balance low, is reported to the credit bureaus, helping to build a positive history.

Another option is a credit-builder loan, which operates somewhat in reverse of a traditional loan. The loan amount, $300 to $1,000, is held by the lender in a secured account like a Certificate of Deposit (CD) while you make regular monthly payments over a term of 6 to 24 months. Your on-time payments are reported to the credit bureaus, and once the loan is fully repaid, you receive the held funds. Becoming an authorized user on another person’s credit card can also help; if the primary cardholder maintains a good payment history and low credit utilization, this positive activity may appear on your credit report.