Matt About Money

Trade credit card for debit? Remember your credit score


A reader asks: If I use my debit card all the time instead of my credit card, what impact will that have on my credit score?

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Dear Opening Credits,
Hi. Although I used to actively use the balance transfer option on zero-interest cards, I always managed to pay them off without a single dollar paid in interest. Over the years, I am a lot less inclined to even use my credit card — I use only one now. My question is: Instead of using a credit card, if I use a debit card all the time, what are the implications to my credit?— Madhu

Dear Madhu,
There is no law that says you must have and use a credit card! Plenty of people choose a cash-only existence and do just fine. However, you are right to be concerned about how dropping out of the system may affect your consumer credit report and credit score. So, before abandoning your last remaining card, understand how such reports function and why they exist.

A credit report is nothing more than a record of your borrowing and repaying history. Subscribers, which include banks, credit unions and collection agencies, regularly update the bureaus with your credit activity. The bureau then compiles and issues a report based on that data. A separate credit scoring company — such as FICO, the creator of the popular FICO credit score — takes the information listed on your report, puts it into a mathematical model and generates a score. Financial institutions and other businesses rely on these reports and scores to make objective decisions, measure risk and set loan and line-of-credit terms.

Debit card activity is not sent to the credit bureaus because its use is not a loan — you are just drawing from the cash in your checking or savings account. To build an attractive credit record, you have to regularly make purchases on credit, keep debt down and make on-time payments. This way, there is a constant stream of current and positive information. Without recent credit activity, your very history takes a hit, as most companies looking at your report have a “What have you done for me lately?” attitude.

You may not need a good credit report and score now, Madhu, but think of the future. Someday, you may want to finance a vehicle, appliance or home. The absence of excellent, up-to-date information in the form of a glowing credit report can work against you.

I strongly suggest you keep your final credit card, as maintaining an account for many years is favorable for your credit history. Still, it’s not your only payment tool option. A charge card may be the perfect bridge between cash and credit cards. Since they don’t offer a revolving debt feature, you have to repay what you charged in full by the due date, and no finance charges are applied. Moreover, charge cards are known for their generous rewards programs. Though most come with annual fees, if you use them responsibly, you can come out ahead with airline miles, cash back, and points for all sorts of fabulous goods and services.

All that said, I’m not trying to dissuade you from giving up on credit. I’m a huge proponent of choice and doing what’s right for you. Indeed, the benefits of adopting a cash-only lifestyle are compelling. Just be aware that debit cards are not ideal for every transaction. For example, if you use them for hotel or vehicle reservations, a hold may be placed on funds, which can tie up cash when you need it. You also lose out on valuable consumer protection that both charge and credit cards offer, a feature that allows you to dispute charges for purchases that weren’t up to par.

Clearly, you know how to manage your money very well, which is wonderful. It is also a reason to not fear credit instruments. Weigh the advantages and disadvantages of all such financial tools before getting or walking away from them.

See related:7 things you must know about credit cards, 10 things you must know about credit reports and scores, 8 legitimate ways to improve your credit score now




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