Does Using a Debit Card Build One's Credit History?

Debit cards are a convenient way for consumers to make purchases since paying with a debit card is faster than writing a check and easier than carrying large amounts of cash. Debit cards are such a common feature of checking accounts that you probably have one in your wallet right now. Unlike credit cards, however, debit cards do not help you build a credit history.

Facts

Your debit card is tied directly to your bank account. When you use your debit card, you are not borrowing money from the bank. You are paying for purchases with your own money. A debit card works the same way as a check. Due to this, some individuals refer to debit cards as "check cards."

Significance

Your credit history is a record of how well you manage debt. Using a debit card does not typically place you in debt, since the card pulls funds directly from your checking account. You do not have to make payments on items you purchase using a debit transaction -- the transaction itself serves as the payment. Credit cards let you borrow money, with interest, and repay the amount you borrow over a set period of time. This builds your credit history because it allows lenders to see how responsibly you made payments on the debt you incurred.

Warning

If you opted for overdraft protection with your bank, your debit card will work even if you do not have the necessary funds in your checking account to cover the transaction. Your bank will then assess a fee for the overdraft. You will continue to incur overdraft fees each time that you make a purchase without enough money in your account to pay for the item.

If you do not promptly pay your overdraft fees, the bank will eventually close your checking account and sell your debt to a collection agency. The collection agency will file a derogatory report with the credit bureaus. Thus, your debit card transactions can appear on your credit history -- but only if you fail to pay off overage charges. Collection accounts on your credit report are always derogatory.

Considerations

Although a debit card doesn't help you build a credit history, responsible use of your debit card demonstrates to the bank that you may be a good candidate for a credit card. Even if you lack a credit history, your own bank may award you a credit card based on your good standing as a customer.

Prevention/Solution

While a debit card doesn't help you build a credit history, it does teach you how to manage your money without overspending -- a quality that will come in handy when managing credit card debt in the future.

If you cannot qualify for a credit card of your own, you can build your credit history by asking a friend or family member that you trust to add your name to their credit card account as an authorized user. The credit card company will then report the account to the credit bureaus in your name as well -- helping you build a credit history that will allow you to qualify for credit on your own.