Debit cards look like credit cards. They frequently have a Visa or MasterCard logo just like credit cards, and you can use them just about anywhere you can use a credit card. However, they work very differently from credit cards. A debit card withdraws money directly from your bank account with each transaction. Since you’re spending your own money instead of borrowing from a credit card company, using a debit cards doesn’t directly help you build your credit. If something goes wrong with your account though, it can have a negative impact on your credit.
The Debit Difference
The terms debit and credit are both used in accounting. In accounting, credits refer to when you get money and debits refer to when you lose money. With a credit card, you get access to the credit card’s money so you can spend it. The act of borrowing money and (hopefully) repaying it in the future is what shows up on your credit report. Since there’s no borrowing involved with a debit card, there’s no reason for it to show up on your credit report. It doesn’t matter if you use a prepaid debit card or one tied to a bank account – neither one is a credit card.
When Debit Goes Wrong
Your credit report doesn’t only show your credit accounts. It also has an area where it shows information on other issues that you experience, like collections or judgments. If you lose a lawsuit, for instance, it could show up on your credit report even if the lawsuit doesn’t have anything to do with one of your credit accounts. Also, if your checking account gets overdrawn and if you don’t pay it off and it ends up in collections, this could also show up when someone does a credit check on you.
Debit Card Benefits
Just because a debit card can’t help your credit score doesn’t mean that it isn’t a useful financial tool. Some people like debit cards because it means that they are spending only what they have. That benefit may outweigh the downside of not getting into debt. On the other hand, you could also use a credit card for some of your purchases and then pay it off each month. Doing this will establish activity for your credit report while letting you still use your debit card for other transactions.
For people who can’t qualify for a credit card, there is a step in between a debit card and a credit card. Secured cards are credit cards that card holders deposit money toward. A secured card works just like a regular credit card. You spend on it and pay the bill every month. And, many secured cards report activity to the credit agencies, thus helping you establish a payment history.
Whether you choose to pay with debit or credit, picking the right plastic for your personal budget is vital to your financial health. Remember, keeping balances low and always paying on time is one solid way to build a positive track record of credit usage.
About the Author
Solomon Poretsky has been a writer since 1996, with experience in the fields of financial services, real estate and technology. Poretsky holds a Bachelor of Arts in political science from Columbia University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2014 ConsumerInfo.com, Inc. All rights reserved.