How Debit Cards Affect Your Credit

Shopper using a debit card to pay for purchase in a store.

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As you build and protect your credit, it’s important to keep an eye on everything that affects credit scores. For the most part, that means making loan payments on time and using credit wisely. But it can get confusing when you consider all the plastic in your wallet: do debit cards affect credit scores, and can they be used to build credit?

Debit Cards and FICO Scores

When it comes to the FICO credit score, the answer is no. The FICO score is the most important credit score for major loans like mortgages, auto loans, and most credit cards. This score should be your priority as you build credit, but there are other credit scores out there. As far as FICO is concerned, the ways to improve your credit score include:

  • Pay your bills on time
  • Borrow in moderation
  • Have a history of borrowing (the longer the better)
  • Use a variety of loan types, and
  • Don’t rack up debts quickly

Credit Transactions on Debit Cards

Debit cards use money from your bank account, so no loan is involved (except for small, short-term loans that might be part of an overdraft line of credit). Credit cards, on the other hand, are most certainly loans – so they affect your credit and can help you build credit.

What if you select “credit” when using your debit card at a retailer – will that cause your debit card to work like a credit card? Choosing “credit” does not really change where the money comes from (your bank account). Instead, it just affects how the transaction is processed (through credit card processing networks). Choosing “credit” will not affect your personal credit.

Alternative Credit Scores

While the FICO score is the most important credit score, other scores are increasingly used for lending decisions – especially for people in the process of building credit. It’s not likely that you’ll get a home loan with one of those scores, but they can help you qualify for smaller loans – which are stepping stones on the way to solid credit history.

With alternative credit scores, it is conceivable that using your debit card will affect your “credit.” However, the effect is most likely indirect. That is, most alternative credit scores look for overall financial responsibility; they want to see that you can avoid overdrawing your checking account and live within your means. Spending too much (whether you swipe your debit card, write a check, or get cash from the ATM) will cause problems: you’ll eventually bounce checks and be unable to pay important expenses like utility bills.

Alternative credit scores don’t look at how you use your debit card, but they may look at things like electricity payments, rent payments, and mobile phone payments. To look good under those programs, you’ll need a history of consistent (and on-time) payments. You’ll only pull that off if you can manage your checking account, so your debit card is indirectly involved.

In addition to paying bills on time, it’s essential to avoid bouncing checks – even if your payee (a family member or friend, for example) doesn’t report to any credit agency. Some “alternative” lending decisions may be made based, in part, by looking at your ChexSystems report (which banks use to track bad checks). What's more, bad checks may eventually be turned over to collection agencies, and those debts will show up on traditional credit reports (and damage your FICO score).

Looking Ahead

What about the future? It’s possible that FICO credit scores will change. At some point, FICO could include debit card used in the credit scoring model. More and more people rely on debit cards, partly because they want to avoid borrowing on credit, and partly because they can’t qualify for a credit card. So, there’s one more reason to use your debit card wisely.