Sure, debit cards look almost identical to credit cards, but they’re very different. Among the biggest differences between these products is one of the most important: Debit cards do not have an effect on your credit score.
Debit card activity isn’t reported to the credit bureaus. Because of that, they don’t show up on your credit reports, so they’re not helping (or hurting) your scores.
This is a pretty important distinction, but most college students don’t know that using checks and debit cards doesn’t help your credit, according to a recent report. The data comes from a U.S. Bank survey of 1,640 undergraduates between the ages of 18 and 30 that is weighted to represent the makeup of U.S. undergraduate enrollment.
In a questionnaire about basic personal finance concepts, 60% of students said that using checks and debit cards helps build credit. The truth is you have to use credit in order to build it (and get more), which means you need a loan, line of credit, credit card or an account reported to the credit bureaus to get started. Despite the often-discussed negative impact of student loan debt (which, to be clear, can be very problematic), student loans are a typical credit starter: You can get federal student loans with no credit history, which makes them easier to get than most credit cards.
Of course, if you have no credit, you may still be able to get a credit card, which is generally regarded as the one of the easiest ways to build credit. If going into debt with a credit card has you worried, you can still build credit by using the card for small purchases and paying off the balance every billing cycle. This lets you establish a strong payment history without incurring expensive interest charges. (You can see how credit card impact your credit with a free credit report summary from Credit.com.)
A lot of people prefer debit cards over credit cards because there’s less temptation to spend money you don’t have (and if you don’t enable overdraft protection on your debit card, you can’t spend money you don’t have). The ability to avoid debt while enjoying the convenience of electronic payment makes debit cards an appealing choice, but keep in mind that you’re not building credit when you use one. Assuming you want to someday buy a house, save money on insurance premiums and get reasonable interest rates when you need to finance a big purchase, you’ll want a good credit score. That’s something to keep in mind if you’re using a debit card instead of a credit card.
- The Best Student Credit Cards in America
- How to Use a Credit Card to Build Credit
- Discover it: Solid Rewards, Service & No Annual Fee
This article originally appeared on Credit.com.
This article by Christine DiGangi was distributed by the Personal Finance Syndication Network.
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