Does a debit card build credit?

A typical debit card doesn’t help build credit, because it draws on your own money instead of a line of credit from a lender. Credit involves borrowing money — often through a loan or credit card — that you pay back later as agreed, usually with interest.

That said, there are new debit cards coming out that are breaking this mold. Like traditional debit cards, these new cards are linked to your bank account.

But instead of pulling funds immediately from your account after a purchase, the debit card issuer covers the cost and then pulls the money from your bank account the next day. It’ll report these transactions as repayments to the credit bureaus. This may allow you to build credit without taking on large debts.

There are also other ways to help establish your credit history or improve your overall credit. We’ll go over some in this article.

How to build credit

Let’s look at several options that may help you build credit if you’re starting out with limited or no credit history.

Open a secured credit card

If your lack of credit history makes opening a regular credit card difficult, consider opening a secured credit card instead. Although the application process is similar to a traditional credit card, secured cards require you to deposit money into a separate account — typically around $50 to $300. You then get a credit line to borrow from, up to the amount of your deposit. As long as the card’s issuer reports your positive payment history to the credit bureaus, a secured card can help you build credit.

Many secured cards allow you to transition later to a traditional credit card. So before opening a card, it may be worth asking your provider if this is an option.

Get a co-signer

If you’re building your credit from scratch, you might need a co-signer to open a traditional credit card or take out a loan. Applying with a co-signer who already has healthy credit may make your application more attractive to lenders and credit card companies.

Bear in mind that adding a co-signer makes them equally responsible for your debt. So you should make sure that the other person thoroughly understands the responsibilities of being a co-signer before making a decision.

Become an authorized user

Another way to help build credit is becoming an authorized user on someone else’s credit card. It’s best to do this with a trusted friend or family member who already has a solid credit history. After all, if the person misses a payment, that information can be reported as a part of your credit history.

Being an authorized user allows you to get a credit card in your name that’s associated with the main cardholder’s account. Some credit card companies will then include your name when reporting the main account’s information to the credit bureaus. Not all companies do this, though, so research the issuer before becoming an authorized user.

Try credit-builder loans

Another option to build credit is to take out a credit-builder loan. According to a 2020 Consumer Financial Protection Bureau study, borrowers who didn’t have any debt experienced the biggest benefits from using this type of credit-building product.

While traditional loans typically allow you to access the money you borrow upfront, credit-builder loans require you to pay a certain amount — or pay in full — before using the borrowed funds. Usually, these loans are smaller than traditional loans, and you may still have to pay interest on these funds, but the benefit is that you can start building your credit history.

Credit Karma’s Credit Builder plan helps you save money and build credit at the same time. Once you determine how much you want to save, the money is deposited into a locked account and you make monthly payments. You can spend the money once you’ve hit at least $500 saved.

Use rent-reporting services

Adding alternative data to your credit profile can also help build credit. Rent-reporting services like LevelCredit can help get your rent payment information to the credit bureaus — although some programs don’t report your payments to all three bureaus.

Keep in mind, this strategy only helps if you regularly pay your rent on time. Missed payments could have an opposite effect on your credit.

How to establish healthy credit habits

When building your credit, one of the first things you want to do is read your credit reports and regularly check for any errors. You can request your credit reports free of charge every 12 months at annualcreditreport.com. And don’t worry, this doesn’t hurt your credit.

Here are some other steps you can take to build your credit history and credit health.

1. Make payments on time. Your payment history is a major factor in your credit scores and overall credit health. It’s a good idea to have a system in place — such as marking due dates in your calendar or setting reminders on your phone — to help you pay your bills on time. Remember, just because an account isn’t reported to the credit bureaus doesn’t mean it can’t affect your credit. If an overdue bill is sent to a collections agency, that can hurt your credit, too.
2. Keep your credit utilization low. Your credit utilization is the amount of your available credit that you’re using and is another important factor in determining your credit scores. In general, people who get too close to their credit limit or surpass it may have a harder time with repayment in the future. So try to use only a small amount of your available credit — preferably less than 30%.  
3. Avoid opening multiple credit accounts back to back. Having a mix of accounts can help build your credit history and improve your credit health, but opening too many in a short amount of time can actually negatively affect your scores.
4. Keep your credit accounts open. Although the length of your credit history doesn’t have as much of an impact on your scores as your payment history or your credit utilization, it’s still an important factor to be aware of. Your credit history length includes how long you’ve been using credit as well as how long you’ve kept specific accounts open.

Next steps

In general, debit cards don’t build credit — although there are new types of debit cards coming out that claim they can. However, these cards are still relatively new.

For people with no credit history, it may make more sense to start building credit by getting a secured credit card, taking out a credit-builder loan, or becoming an authorized user on someone else’s card.

Keep in mind before signing up for any credit-building product or service, it’s a good idea to do research to avoid unpleasant fees, hidden penalties or scams.