Building credit is an essential part of maintaining a healthy financial life. Your credit score plays a significant role in determining whether you can qualify for loans, credit cards, and even some jobs. Most people believe that the only way to build credit is by using a credit card. However, this is not true. It is possible to build credit with a debit card, and this article will show you how.
Understanding the Credit Score
Before we dive into the details, let’s briefly explain what a credit score is. A credit score is a three-digit number that ranges from 300 to 850. The higher the score, the better your creditworthiness. Credit scores are calculated based on your credit history, including your payment history, credit utilization, length of credit history, types of credit used, and new credit applications.
Credit scores are used by lenders, credit card issuers, and other financial institutions to determine your creditworthiness. A good credit score can help you secure loans, credit cards, and even better interest rates.
How to Build Credit with a Debit Card
Now that you have a basic understanding of credit scores, let’s discuss how you can build credit with a debit card. It is essential to note that a debit card is not a credit card. A debit card is linked to your checking account and allows you to spend money that you have already deposited. A credit card, on the other hand, allows you to borrow money that you must repay with interest.
However, there are a few ways to use your debit card to build credit:
Open a Checking Account with Overdraft Protection
One of the easiest ways to build credit with a debit card is to open a checking account with overdraft protection. Overdraft protection allows you to withdraw money from your checking account even if you do not have sufficient funds. However, this comes with a fee.
Overdraft protection is a form of credit. Every time you withdraw more money than you have in your account, the bank extends credit to cover the difference. This credit is reported to credit bureaus, and it can help you build credit.
However, be sure to use overdraft protection responsibly. Do not use it as a substitute for a credit card or a way to overspend. Overdraft fees can quickly add up, and they can hurt your finances.
Sign Up for a Rent-Reporting Service
Rent is typically the most significant monthly expense for most people. However, most landlords and property managers do not report rent payments to credit bureaus. This means that your on-time rent payments do not contribute to your credit score.
Fortunately, there are rent-reporting services that can help you build credit with your debit card. These services report your rent payments to credit bureaus, which can help you establish a credit history.
Some of the popular rent-reporting services include RentTrack, Rental Kharma, and RentReporters. These services charge a small fee, but they can be worth it if you want to build credit with your debit card.
Use a Debit Card with a Credit-Builder Feature
Some debit cards come with a credit-builder feature. This feature allows you to borrow a small amount of money, usually up to $1,000, which you must repay with interest. The repayment is reported to credit bureaus, which can help you build credit.
One of the most popular debit cards with a credit-builder feature is the Self Visa Credit Card. This card works like a traditional credit card, but it is secured with your own money. You must deposit funds to the card, and you can borrow up to the deposited amount. The repayment history is reported to credit bureaus, and it can help you build credit.
Keep in mind that debit cards with credit-builder features often come with high-interest rates and fees. Be sure to read the terms and conditions carefully before signing up for one of these cards. Also, make sure that the card issuer reports your payment history to credit bureaus.
Make On-Time Payments
Whether you are using overdraft protection, rent-reporting services, or a debit card with a credit-builder feature, the most critical factor in building credit is making on-time payments. Late payments can have a significant negative impact on your credit score, so it is crucial to pay on time every month.
If you are using overdraft protection, make sure that you have enough funds in your account to cover the overdraft fees. If you are using a rent-reporting service or a debit card with a credit-builder feature, make sure that you make the payment on or before the due date.
Monitor Your Credit Score
Finally, it is essential to monitor your credit score regularly. You can get a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year at AnnualCreditReport.com. You can also use credit monitoring services, such as Credit Karma, to monitor your credit score and receive alerts if there are any changes.
Also read: Best Cash Back Credit Cards 2023
Conclusion
Building credit with a debit card is possible, but it requires careful planning and responsible use. Whether you are using overdraft protection, rent-reporting services, or a debit card with a credit-builder feature, make sure that you make on-time payments and monitor your credit score regularly. With time and responsible use, you can build a solid credit history that can help you achieve your financial goals.