Does Closing a Debit Card Hurt Credit?
Unpack the truth: closing a debit card does not affect your credit score. Understand the real mechanics of credit building.
It is a common misunderstanding that closing a debit card can negatively impact your credit score. However, using or closing a debit card does not directly affect your credit score. Understanding the distinction between debit and credit products is crucial, and this article will explain their fundamental differences.
Understanding Debit Cards
A debit card provides direct access to funds held in your checking account. When you make a purchase or withdraw cash, the money is immediately deducted from your available balance. This means you are spending your own money, not borrowing funds.
Debit cards function as a convenient tool for managing daily expenses without incurring debt. They are widely accepted for online and in-person transactions, often requiring a Personal Identification Number (PIN) for verification. Transactions are recorded in your bank account statement, aiding in tracking spending and budgeting.
Understanding Credit Scores
A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. Lenders use this score to evaluate the potential risk associated with lending money. A higher score indicates lower risk, leading to more favorable terms for loans and credit products.
Credit scores are built upon an individual’s credit history, including active accounts, total debt levels, and repayment behavior. Their primary purpose is to help lenders assess how likely an applicant is to repay borrowed funds on time, assisting in decisions regarding loan approvals, interest rates, and credit limits.
Why Debit Cards Do Not Affect Credit
Debit card activity has no bearing on your credit score because these transactions do not involve borrowing money. You utilize your own existing funds, and no debt is created. This means banks do not report debit card usage to credit bureaus.
Credit bureaus, such as Equifax, Experian, and TransUnion, collect information specifically related to borrowed funds and repayment behavior. Since debit card transactions are not a form of credit, they are not included in your credit report or influence your credit score. Therefore, opening, using, or closing a debit card account will not impact your credit history or score.
Factors That Shape Your Credit Score
Your credit score is influenced by several categories of information found in your credit report. Payment history is the most significant factor, accounting for a large portion of your score. Consistent on-time payments contribute positively, while late or missed payments negatively affect your score.
Amounts owed, also known as credit utilization, is another substantial factor. This refers to the percentage of your available credit currently in use, with lower utilization being more favorable. It is recommended to keep credit card balances below 30% of the available limit to maintain a healthy score.
The length of your credit history also plays a role, as a longer history of responsible credit management is beneficial. Credit scoring models consider the age of your oldest account and the average age of all your accounts. Your credit mix, including different types of credit like credit cards and installment loans, can demonstrate your ability to manage various forms of debt.
Lastly, new credit, including recent applications and newly opened accounts, can influence your score. Each hard inquiry from a credit application can temporarily lower your score by a few points. While opening new accounts can be positive long-term by improving credit mix or utilization, applying for too much new credit in a short period can be viewed as a higher risk.