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Even if you're using your debit card responsibly and have never overdrawn your bank account, the purchases made with a debit card do not normally help you build credit. They're different from credit cards, which show up on your credit report and influence your credit score. That's not to say that debit card usage is irrelevant. On the contrary, it's a key part of maintaining a healthy financial life. It just won't do much to build your credit.
Why Debit Cards Usually Don't Affect Your Credit Score
Debit cards are linked to your checking account. Whenever a debit transaction is made, the funds are directly withdrawn from that account. In this way, the debit card works a lot like cash. Unlike with credit cards, you're using your own money in real time to cover the cost of each transaction—there's no "credit" accessed in debit transactions.
Credit is established and maintained when you borrow money from a financial institution. Credit cards are a great example. Whenever you swipe your card, the creditor pays the merchant on your behalf. You then accumulate a balance that's your responsibility to repay. You can either pay it in full at the end of each billing cycle or pay a portion and carry the remaining balance. Just know that you'll be charged a fee for carrying the debt—which can be hefty. The average credit card APR is currently 16.3%, according to the Federal Reserve.
Creditors report your payment history and account balances to the three major consumer credit bureaus (Experian, TransUnion and Equifax). Each one maintains its own credit report in your name. The information on your credit reports is what credit scoring models such as those created by FICO and VantageScore® use to determine your credit score.
Debit card information, on the other hand, does not usually appear on your credit report. Some financial companies may be looking for ways to change that, however. For example, the Extra debit card reports payments it debits from your connected bank account to the credit bureaus. This type of debit card is rare, however, and other actions may provide a more established path to growing your credit score, at least for now.
How to Begin Building Credit
Building a healthy credit history is a fundamental part of financial well-being. If you're just starting out, focus on accounts that will show up on your credit report. Consider the following options:
- Try opening a traditional credit card. Some creditors require an existing credit history. If you have a thin credit file or negative credit history, you may still be able to qualify for a new account. Opening a store credit card is one option, as they typically have looser qualifying criteria (though they tend to charge high interest). Either way, the idea is to use credit responsibly. Only incur charges that you'll be able to pay off in full each month—and be sure to avoid late payments. If you do carry a balance, it's wise to keep it below 30% of your credit line to help prevent a significant dip in your credit score.
- Opt for a secured credit card. If opening a traditional unsecured credit card isn't an option, you may have more luck applying for a secured credit card. Secured credit cards require you to make an upfront security deposit to reduce risk to the lender; your deposit often equals your credit limit. You use a secured card like any other credit card, and if the card issuer reports payments to one or more of the credit bureaus, your payment history will show up on your credit report. Some creditors may convert your secured card to an unsecured credit card after a certain number of months of responsible usage. You can find secured cards that may fit your needs using Experian's CreditMatch™ marketplace.
- Becoming an authorized user on someone else's account. A family member may be open to adding you as an authorized user on one of their credit cards. You'll receive a card in your name and, if the card issuer reports authorized user accounts, it will then be added to your credit file and help you establish a credit history. You won't be responsible for making payments, though you will need to reimburse the primary account holder if you want them to keep you on the account. Just make sure you ask someone who you know pays all their bills on time and keeps their card balance low so you get the most benefit.
- Pay all your loans on time. Installment loans come in all shapes and sizes. Whether it's a student loan, personal loan, mortgage or car loan, making on-time payments is one of the best things you can do for your credit. Missed payments can drag down your credit score and stay on your credit report for up to seven years.
Improve Your Credit with Experian Boost®ø
Another simple way to build your credit is to link your phone, utilities and other eligible service payments to your credit report. Experian Boost lets you do just that. As a result, these accounts will show up on your Experian credit file and can instantly increase your credit score powered by Experian data. Similarly, Experian RentBureau can add your monthly rent payments to your credit file as well.