Can You Build Credit With a Debit Card?

Over the last few years, debit cards have risen in popularity for everyday use, particularly among younger demographics. For example, nearly 70% of Gen Z individuals use their debit card at least once a week, according to a recent EY study. However, this preference may come down to a general misunderstanding of how credit cards fit into personal finances. After all, debt can be intimidating, and with debit cards the risk of overspending is mitigated, sometimes even penalized, by the parameters set by your financial institution.

Unfortunately, using debit cards exclusively won’t help you build credit, and a healthy credit score is an important factor considered when you acquire a lease, mortgage, car loan, etc. It can also mean the difference in the amount paid for those things over time, since creditworthiness often impacts the rates and terms you’re offered when taking on major purchases.

That’s why credit-building tools, like credit cards, can play a key role when working towards personal financial goals. Debit and credit cards may seem interchangeable, and to some extent, they can be in their purchasing use. However, only one of these helps you build credit.

Here are a few reasons to put down your debit card and pull out your credit card for certain purchases.

Why You Can’t Build Credit with Traditional Debit Cards

Debit cards function as extensions of your checking account. Funds used to purchase goods or services with a debit card come directly from your checking account and funds can also be withdrawn from an ATM using a debit card. As we’ve mentioned, using a debit card means you are limited to what you have in your checking account. If you overspend, you will typically be charged an overdraft fee.

Traditional credit cards, like a store credit card or airline miles card, let you buy things on borrowed money (i.e., credit). Each card will have specific advantages and conditions of use, but all credit cards set limits on how much can be spent based on the credit line approved for you. You must pay back the money you spent on it, plus interest on any balance you’ve accrued. 

Using credit cards impact your credit score because they demonstrate how you handle money lent to you. Simply put, making consistent payments and sticking to your credit limit boosts your score, while activities like late payments will negatively impact your score.

Your credit card payment history is reported to the three major credit bureaus: Experian, TransUnion, and Equifax. These companies create and maintain your credit report, which is used to determine your credit score. You can contact them to see your credit report, or many banks and credit cards are now providing free FICO scores each billing cycle.

Unlike credit cards, traditional debit cards aren’t tied to credit. The money you have in your checking account is the only money you can spend. A debit card is thus effectively the same as using cash from a credit perspective. Your debit card information is not sent to the consumer credit bureaus, so it does not appear on your credit report.

When to Use a Debit Card

Although you cannot build credit with a traditional debit card, debit cards do have several benefits. Even if you want to build credit, there are times when you might want to use your debit card instead.

• Access Cash Quickly – When you need cash, you can simply visit an ATM and use your debit card to process a withdrawal. You can use credit cards to take cash out (called a cash advance), but it’s treated like a purchase in that it will earn interest, making it a more expensive route. Remember that you might be charged a small fee if you use an ATM that doesn’t belong to your bank. Still, it will be less expensive than the interest on the cash advance of a credit card.
• Prevent Overspending – Using your debit card means you are limited to what’s in your bank account. Even though that new TV might be tempting, you would rethink it if you didn’t have enough to pay for it in your checking account. It’s easier to overspend with credit cards since they can promote a “buy now, pay later” mindset. If you follow that line of thinking a few too many times, you’ll end up with a balance large enough to impact your credit score, not to mention your monthly payments.
• Avoid Interest – When you want to make a substantial purchase but without the additional interest from breaking that purchase into payments, sometimes the best choice is to save up and pay for it “in cash.” Though you should confirm the daily spending limitations, debit cards can be used to make relatively large purchases without any additional fees or interest – unless you overdraw your account.

When to Use a Credit Card

When used responsibly, credit cards can help bolster your financial health and provide you with special perks. Some of the benefits of using a credit card include:

• Build Credit Score – The number one reason to use a credit card is to help build up your credit score. By using your card a few times a month and paying off the balance quickly and in full each cycle, you will help to improve your credit score over time. Even if you have poor credit, there are many options you can apply for that will help you turn it around.
• Rewards – Some debit cards offer savings when you use them, but it’s also important to explore the perks you can get with credit cards. From travel rewards to percentages off groceries, credit card companies offer a variety of “cashback” or discount options. Savvy credit card users can save a significant amount of money when they tap into their rewards.
• Emergency Funds – When you’re in a pinch, sometimes dipping into your checking or savings accounts can feel risky, since doing so might limit you for the rest of your pay period or otherwise set you back from your financial goals. A credit card allows you to cover unexpected expenses, giving you the option to pay off your balance on a less rushed timeline. That said, make sure to pay off your balance as soon as possible to avoid interest or any hits on your credit report.

Final Considerations

Debit cards are handy as a financial tool, and more and more people are using them to make everyday purchases and avoid overspending. However, the bottom line? They won’t help improve your credit score.

If you want to avoid credit cards but still enjoy rewards like cashback, you can explore checking accounts that offer reward debit card transactions.

Understanding the different uses of debit and credit cards is one foundational step towards becoming a financially literate person, capable of navigating the nearly endless options you have for managing your money. Consider how to best use both to your advantage as you move toward your financial goals.

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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.