Understanding the Impact of Debit Cards on Your Credit Score

When it comes to managing your finances, understanding how different types of cards affect your credit score is crucial. At O1ne Mortgage, we believe in empowering our clients with the knowledge they need to make informed financial decisions. In this blog, we’ll explore why debit cards generally don’t affect your credit score, the pros and cons of withdrawing cash from debit versus credit cards, and effective strategies to build your credit. For personalized mortgage services, feel free to call us at 213-732-3074.

Why Debit Cards Generally Don’t Affect Your Credit Score

Debit cards are not typically considered a form of credit. When you use a debit card, you are spending money that you already have in your bank account. This means that most debit card transactions are not reported to the credit bureaus, and therefore, they do not appear on your credit reports, which are used to calculate your credit scores.

However, there are exceptions. For instance, the Experian Smart Money™ Digital Checking Account and Debit Card can help you build credit without incurring debt. This account links to Experian Boost®, a feature that adds eligible bill payments to your Experian credit report. These payments can include utilities, phone, insurance, rent, and streaming services. By paying these bills from your Experian Smart Money Digital Checking Account, you could see an improvement in your credit scores based on your Experian credit report after three months of payments.

Other services, such as Extra and Fizz, offer debit cards or debit-credit hybrid cards that can potentially help improve your credit scores. These programs operate differently from traditional debit cards, and some may not allow you to withdraw cash.

Is It Better to Withdraw Cash From a Debit Card or Credit Card?

Withdrawing cash using a credit card is possible through a cash advance, but it comes with several drawbacks:

• Credit card issuers often charge a 3% to 5% cash advance fee.
• Interest on cash advances may start accruing immediately.
• Many credit cards have a higher annual percentage rate (APR) for cash advances.
• Your card’s cash advance limit may be lower than its credit limit.

Cash advances also increase your card’s balance, which can raise your credit utilization ratio and potentially hurt your credit scores. While cash advances can be helpful in emergencies, the associated fees and interest make it generally better to use a debit card for ATM withdrawals or purchases.

How to Build Credit

Building credit is essential for securing favorable loan terms and interest rates. Here are some effective strategies to establish and improve your credit:

Open a Credit Card

Many credit card issuers report your account and payments to all three major credit bureaus (Experian, TransUnion, and Equifax). By paying your balance in full each month, you can avoid interest charges. Depending on your credit score, you can consider different types of credit cards:

• Unsecured credit cards: These are standard credit cards that you qualify for based on your creditworthiness. They can include rewards, travel, and balance transfer cards.
• Store cards: These are unsecured cards that are often part of a retailer’s rewards program and may be easier to qualify for than general rewards cards.
• Secured credit cards: These require a refundable security deposit, which often determines the card’s credit limit. They are easier to qualify for and can offer rewards without an annual fee.
• Cards that don’t require a credit history: Some issuers consider your banking history rather than your credit history, making them a good option if you have no credit or are rebuilding your credit.

Regardless of the type of credit card, timely payments and maintaining a low utilization ratio are crucial for improving your credit.

Become an Authorized User

Another way to build credit is by becoming an authorized user on someone else’s credit card. You won’t be responsible for the payments, but the account may be reported to the credit bureaus under your name. This can help your credit scores if the primary cardholder has a good payment history and low utilization ratio.

Get a Credit-Builder Loan

A mix of revolving and installment credit accounts, such as credit cards and loans, can benefit your credit scores. On-time loan payments contribute to a positive payment history. If you don’t have a loan, consider a credit-builder loan or a fee-free lending circle. These are often easy to qualify for and relatively inexpensive.

Track Your Credit-Building Progress

Monitoring your credit is essential for tracking your progress. Experian offers free credit monitoring, including FICO® Score tracking and real-time alerts for changes to your credit file. If you’re looking for a credit card, Experian can also show offers based on your credit profile.

At O1ne Mortgage, we are committed to helping you achieve your financial goals. Whether you’re looking to build your credit or need mortgage services, our team is here to assist you. Call us today at 213-732-3074 to learn more about how we can help you navigate your financial journey.