Debit Cards & Credit Ratings

Many checking accounts come with a debit card. Debit cards look and spend like credit cards, but the comparison ends there. A debit card does not have the same effect on your credit history or credit rating. In fact, it may never affect your rating at all if you watch your spending.

Basic Use

Debit cards allow you to make purchases using the funds in your checking account without having to write checks. A debit card carries a MasterCard or Visa logo. You can swipe your debit card through any point-of-sale machine or use it online. When you make a purchase, the funds are withdrawn automatically from your checking account. Most banks allow you to use your debt card free of charge. However, you can accrue fees by spending more money than you have available in your account. Doing so will result in an overdraft charge.

Typical Credit Rating Effect

Banks do not typically report the day-to-day activity on your debit card to the credit bureaus. If you manage your debit card responsibly, it will not appear on your credit report. However, if you overdraw your account, the bank will not report it to the credit bureaus as long as you remedy the situation quickly by paying any fees you owe to the bank. Since daily activity does not appear on your credit report, a debit card will not help raise your credit rating.

Charge-Offs

If you allow your checking account to go into overdraft status and do not pay off the negative balance, the bank will eventually close your checking account. When the bank closes your checking account, it will write off your debt as a charge-off. Bankrate.com reports that lenders typically write off accounts as a charge-off after 120 to 180 days of nonpayment. The bank is then likely to sell your account to a collection agency. Both the charge-off and the collection file will appear on your credit report, leaving a negative mark, which will lower your credit rating.

Considerations

Avoid going over your available balance by tracking your spending. You can monitor the funds in your checking account online with most banks. You can also use your check register to keep track of debit-card purchases. Steering clear of overdrafts will save you money. If you do overdraw your account, pay the negative balance immediately. You cannot remove a charge-off account from your credit report once the bank adds the information.