debit card transaction

Do Debit Cards Build Credit?

The rise of fintech and digitization has essentially replaced the cash economy with plastic cards divided into two camps – debit cards and credit cards. The economies behind these transactions are massive enough to decide whether the swipe of a card can get you the loan to your dream house or be a permanent stain on your credit file.

Most people know that credit cards offer the owner an extension of credit, which can help you build credit. But do debit cards build credit? Traditional debit cards will not enable you to build that ever-important score independently, but a new age of debit cards explained below can build credit.

When building credit, the essential tactic is to use a small percentage of your available credit balance. Therefore, if you use your open credit card balance less and your debit card more, this strategy can assist you in building your credit score.

This article will explain why building credit is necessary to improve your personal finances, the change in traditional and new-generation debit cards, and other ways to build credit outside your debit transaction.

Why Build Credit?

Financial power goes beyond the short-term. That’s why financial institutions made a billion-dollar industry from lending money in the form of credit – encompassing everyday purchases up to massive investments.

Because our economy’s trust runs on numbers, our major life decisions can be affected by our credit score, hence why building credit is essential, even when you think you have enough money in the bank.

Access to Financial Opportunities

Your credit record can increase approvals from credit card issuers and loan providers. Showing that you have paid off your student loan, car loan, and other debt creates a trustworthy credit profile that gets you access to more money with lower interest charges as a reward. As a result, you have more financial freedom.

Lucrative Benefits

Credit card purchases differ not just on the source of money but also on the potential of returns. Typically a debit card purchase worth the same amount may have different deals and rewards than what a credit card company might offer. Hence, using debit cards alone in the interest of financial control may come at the expense of potential cash back, perks, and savings.

The Traditional Debit Card

Why Debit Cards Don’t Improve Credit Report

Traditional debit cards cannot improve or help build credit. While you do pay right away, even in voluminous transactions, so as long as a debit card is used, it cannot increase your credit rating because it does not show your capacity to handle debt.

However, even if a debit card cannot improve your credit score, it can negatively affect your score in the case of overdraft fees. An overdraft fee is when the account is charged more than the amount it has. For example, a series of overdrafts can lead to a closed account or a reported issue to ChexSystems, which is a credit reporting alternative that financial institutions use to evaluate your personal finances.

Advantages of a Traditional Debit Card and Bank Account

While traditional debit cards do not help you build credit, they have their own unique advantages.

Better Financial Control

Debit cards prevent what everyone wants to avoid – debt. Spending your own money circumstantially creates stricter monetary controls as there are fewer to no other alternatives. Moreover, this comes with the convenience of credit cards – online shopping, a universally-accepted payment method, and easy to get – but without the risk of interest rates.

More Accessible Funds

A bank account with a debit card is better for storing emergency funds where you can access cash and ATMs whenever necessary. Unlike a credit card that imposes a credit limit or issues an amount depending on your credit score, a debit card grants immediate access to all your hard-earned money.

New Generation of Credit-Building Debit Cards

Due to the importance of building credit, credit-building debit cards are gaining mainstream acceptance. The vision is to include the benefits of a credit card for debit card users to some extent.

How Does It Work?

The downside to having a traditional credit card is the risk of overspending, which leads to an increase in the credit utilization ratio, leading to credit card debt. A debit card can not only remove the risk of overspending but improve the credit ratio of a less-used credit card.

When you purchase, the card issuer initially pays for it before deducting the amount from the bank account the next day. Because there was debt involved, it can be included in the credit scoring models that, in turn, increase the credit score.

Some companies also started offering debit cards specifically to help users build credit. In this case, the debit card is linked to a bank account and would make normal transactions. However, at the end of the month, a portion of what was spent is reported to the three credit bureaus, much like how credit cards work. Nevertheless, these types of debit cards are uncommon and utilized most by individuals rebuilding their credit.

Credit Building Debit Cards In The Market

Extra Debit Card

The Extra Debit Card is one of the first to offer credit-building debit cards, and their product is one of the highest-rated ones in the market.

Its main advantage is the speed of credit-building as every purchase builds credit and is reported to two credit bureaus monthly. However, it comes with high fees and the inability to use the card for ATM withdrawals.  

Sesame Cash Debit Card

The Sesame Cash Debit Card is known for its no fees offer. Its main advantage is that it pays you to improve your credit by rewarding you with bonuses whenever you reach a specific scale in its credit point system.

Unlike the Extra Debit Card, this will allow you to withdraw cash from ATMs. Its no fees system applies to no foreign transaction fees and no overdraft fees as well.

Sequin Debit Card

The Sequin Debit Card is subscription-based, offering a monthly and annual plan. Unlike other cards with a credit limit, Sequin does not impose a credit limit aside from the amount in your account balance. The higher the limit, the more repayment, and the more credit history is reported.

Other Ways to Build Credit

Building credit is not limited to your debit card. In fact, a good credit score is built on multiple sources showing concrete evidence of a trustworthy user.

Use Credit Cards Responsibly

Owning a credit card is not enough, you need to maximize its credit-building capabilities.

Keep Credit Utilization Ratio to 30% Maximum

A credit utilization ratio measures the amount of money borrowed versus the credit card issuer’s credit limit. For example, a $300 debt against a $1,000 credit limit equals a ratio of 30%, the maximum ratio recommended ratio to prevent hurting your credit score. Pay debt on time to maintain a 10% or lower percentage, ideally.

Review Credit Reports

Past mistakes are not irredeemable, and reviewing credit reports will keep you on track. Moreover, this can help you spot errors from credit bureaus that may have dropped a few points from your score or identify identity fraud.

Have a Credit Building Plan

Debit and credit cards are just one of the ways to reach your goal. In addition, you should have a plan and monitor your credit score over time.

Choose A Secured Credit Card Issuer

In cases where you don’t qualify for a traditional credit card yet, a secured credit card can take its place in the meantime.

The application requires a security cash deposit, usually the credit limit set to the account. Falling behind monthly payments will come at the expense of the security deposit, though this should be fine if your goal is to pay on time and build a good credit history.

Get a Credit Builder Loan

A credit-builder loan differs from a traditional loan in purpose. A traditional loan will present the money upfront because it will be used for an expense, while a credit-builder loan is an opportunity to show how a user can make consistent and timely payments.

In the latter, the net amount is given at the end of the loan’s term, assuming monthly payments have been made. The activity is then reported to the credit bureaus. 

Don’t Delay, Build Credit Today

Technology has evolved to merge the best features of credit-building instruments. This is the opportune time to take advantage but if circumstances don’t permit, starting early with other alternatives is still better than delaying building your credit.

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Josh Dudick

Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.

Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.

Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.

Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.

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