A debit card looks similar to a credit card and can be used almost anywhere a credit card is accepted, but the two cards work very differently. Each card has different effects on your credit rating. In general, a debit card cannot be used to build credit. So, it is not considered to be a major credit card by utilities or credit rating agencies.
Understanding Differences Between Cards
A debit card works like a plastic check or plastic cash, and is not considered a credit card. When you use a debit card, the money is immediately taken out of your bank account. Unless you have overdraft protection, you cannot use a debit card if you do not have sufficient funds in your account to cover the transaction.
The Consumer Financial Protection Bureau points out that when you use a credit card, you are borrowing money from the card provider. You can use a credit card even if you have no money in your bank account. Credit cards charge interest, but if you pay off your balance in full within the billing period – usually 30 days – you will not have to pay interest.
Building Your Credit
Whenever you make a payment on a credit card, you are building credit. The credit reporting bureaus, such as Experian, will record whether you make your credit card payments on time. In general, the longer you go paying your credit card bills on time, the higher your credit rating will be. If you miss payments, your credit rating may be affected.
There are no bills to pay with a debit card, as the money is taken automatically from your account. So, using a debit card will not improve your credit rating.
Using Secured Credit Cards
One option for those seeking to build credit is a secured credit card. Secured credit cards allow users to put down a deposit upfront to minimize the risk to the credit provider if the user can't make the monthly payments. Investopedia lists secured credit cards as a good choice for individuals with poor credit or no credit, as it gives them the opportunity to create a positive payment history. It's important to note, however, that you'll likely have a higher interest rate with a secured credit card then you would with a traditional credit card.
Some lenders do not report the use of secured credit cards to any of the credit reporting bureaus, so these cards may not affect your credit rating and may not be considered a major credit card. Some providers will let you convert a secured credit card into a major credit card after a period of time. So, they can be a great way to start building credit, for example, after a bankruptcy.
Exploring Debit Card Drawbacks
Although a debit card is not considered a major credit card and will not help you to build credit, it can hurt your credit rating. If you have overdraft protection with your debit card and consistently use your overdraw without paying it off, the bank can report this to the credit rating bureaus, and this may lower your credit rating. If you run up a high overdraft that you do not pay off in the required time period, the overdraft is treated as a debt.
If this debt ends up being sent to a collection agency, this will be reported to the credit bureaus and could also hurt your credit rating.
Since graduating with a degree in biology, Lisa Magloff has worked in many countries. Accordingly, she specializes in writing about science and travel and has written for publications as diverse as the "Snowmass Sun" and "Caterer Middle East." With numerous published books and newspaper and magazine articles to her credit, Magloff has an eclectic knowledge of everything from cooking to nuclear reactor maintenance.