Can You Use a Debit Card to Build Credit?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

Debit and credit cards can both be used to make everyday purchases. However, they aren’t quite the same. In this guide, you will learn why debit cards don’t help boost your credit score and ways to effectively use credit cards to meet your credit goals without spending a fortune in interest.

Build Credit and Savings with Self

 
Self, also known as Self Lender, offers an easy way to build your credit scores with a credit builder loan and credit card.

Can You Build Credit with a Debit Card?

In short, no. When you swipe or input your debit card information to make a purchase, the funds are drawn directly from your checking account. Your financial institution keeps a record of debit card transactions. 

You can view this activity online (if your bank or credit union offers online banking) or read the monthly statements. However, transaction activity is not reported to the three credit bureaus – Experian, TransUnion and Equifax. 

Credit cards operate like debit cards, but a few key differences exist. Instead of using your own money to make purchases, the funds come from a line of credit you’re granted by the credit card issuer. Furthermore, account activity is reported to the credit bureaus each month and impacts your credit score. This includes the credit limit, current balance, monthly payment amount, payment history and account status. 

What is a Secured Credit Card?

A secured credit card works like a traditional credit card but caters to credit-challenged consumers. It requires a cash deposit to establish your credit limit and minimize the risk the credit card issuer assumes. So, if you deposit $500, your credit limit will typically be $500. 

You’ll be required to make at least the minimum monthly payment to keep the account in good standing. Then, the credit card issuer could upgrade you to an unsecured card and return your security deposit over time. But if you miss payments, the credit card issuer could recoup their losses by taking some or all of your deposit.

How Do Secured Cards Help You Build Credit?

There are two primary ways to build credit with a secured credit card:

  • Payment history: It accounts for 35 percent of your credit score. Making timely payments on your secured credit card over time will add positive payment history to your credit report and improve your credit score. But if you fall behind and your account reaches 30 or more days past due, your credit score could drop significantly if the creditor reports the delinquency.
  • Amounts owed: Your credit utilization, or the percentage of your credit limit on all your cards, makes up 30 percent of your credit score. Ideally, you want to keep this figure at or below 30 percent – 10 percent is even more ideal for achieving a good or excellent credit score. So, if you have two secured credit cards with $500 limits and use $100 on each, your credit utilization will be 20 percent. This percentage is relatively low, but you could reduce the balances even more, to possibly improve your credit score.

The Difference Between a Debit Card, a Secured Credit Card and an Unsecured Credit Card

When to Use a Debit Card to Build Credit

As mentioned above, a traditional debit card won’t help you build credit. Still, it can be the best choice if you have the cash on hand to make a purchase and would prefer to steer clear of debt and interest charges. 

When to Use a Secured Credit Card to Build Credit

If you’ve tried applying for unsecured credit cards but haven’t had much luck, consider using a secured credit card to build credit. While you’ll have to make a deposit to establish your credit line, you may qualify for a product with minimal fees that offers cashback rewards. 

Build Credit and Savings with Self

 
Self, also known as Self Lender, offers an easy way to build your credit scores with a credit builder loan and credit card.

When to Use an Unsecured Credit Card to Build Credit

Unsecured credit cards don’t require a security deposit and are generally reserved for consumers with good or excellent credit. However, some credit card issuers target individuals with lower credit scores. Still, they typically charge hefty fees and interest rates for their unsecured credit card products. 

How Credit Builder Loans Work to Build Your Credit 

Would you prefer to explore other options to build credit before settling for a credit card? A credit builder loan, which aims to help you build a positive credit history, could be ideal for your financial situation.

It’s an installment loan that differs slightly from a traditional personal loan. Instead of receiving the loan proceeds upfront, they’ll be deposited into a certificate of deposit (CD) or savings account and remain there until the loan is paid off. And you’ll still make monthly payments reported to the credit bureaus to build up your payment history. 

Here’s a step-by-step breakdown of how credit builder loans work: 

  • Step 1: Apply for a credit builder loan through your bank, credit union or a reputable company like Self.
  • Step 2: If your application is approved, the loan proceeds are deposited into a certificate of deposit.
  • Step 3: Make the required monthly payment over the loan term.
  • Step 4: The lender reports payments to the credit bureaus each month.
  • Step 5: The funds are released to you, minus interest and fees, when you reach the end of the term and the loan is paid in full.

The Advantages of Credit Builder Loans Over Credit Cards

Are you torn between which option is best? A credit builder loan could be more ideal than a credit card to boost your credit health for these reasons: 

  • You will save money while building credit. 
  • You don’t need good or excellent credit to qualify. 
  • You could get approved for a credit builder loan if you have limited or no credit history
  • The monthly payments are usually affordable. 
  • Credit builder loans generally come with lower interest rates and fees than credit cards.

Where You Can Get a Credit Builder Loan

Credit builder loans are available through select banks and credit unions. You can also get a loan through a company, like Self, that specializes in providing affordable credit-building products to consumers. There are three accounts to choose from: 

  • Small Builder: comes with a 24-month term, $25 monthly payment, and you’ll get $520 when the account is paid off
  • Medium Builder: comes with a 24-month term, $35 monthly payment, and you’ll get $724 when the account is paid off
  • Large Builder: comes with a 12-month term, $48 monthly payment, and you’ll get $539 when the account is paid off

Quick note: A $9 administrative fee applies to each account. 

It’s easy to apply and only takes a few minutes. All it takes is entering your email address to get started. Even better, there’s no impact on your credit score, and all you need is a bank account, debit card, or prepaid card to get started. 

Bottom Line: Practice Good Credit Habits

Ultimately, establishing a solid credit foundation comes down to managing your debt accounts responsibly and paying your bills on time. Whether you choose a credit card or credit-builder loan to build credit, you want to stay on top of your monthly payments. And should you decide to go with a credit card, it’s equally vital that you keep your balance low to improve your credit health.

Self

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