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Can Debit Cards Hurt Your Credit Score?

Posted on July 22, 2011

Since the credit crunch, more people have decided to use debit cards instead of credit cards for their purchases. On one hand, using debit cards can be smarter since the transactions come straight from your checking account – you don’t have to repay a credit card balance. But, there may be some drawbacks to using your debit card; your credit score could be affected.

What Affects Your Credit Score

Using a debit card in itself isn’t going to affect your credit score. Your checking account activity isn’t normally listed on your credit report. Even overdrafts don’t appear on your credit report unless the account gets closed and you never pay back the delinquent balance. Of course, that’s a stretch. You need your checking account so you’ll probably clear up any overdrafts quickly and your credit score won’t get hurt in that way.

What does happen when you choose your debit card for purchases is that your credit card gets neglected. After your credit card is inactive for several months, the credit scoring calculation ignores that account on your credit report. If this account has a good amount of available credit, your credit utilization could go up and your credit score will drop. Fortunately, all you have to do to reactive your credit card is use it. Once your account becomes active again, the credit scoring calculation will once again include that account in your credit score.

Credit card issuers don’t like inactive credit card accounts. In fact, your credit card issuer could close your account if it remains dormant for several months. A closed credit card would affect your account in the same way as an inactive account. The difference is it’s not as easy to reopen a closed account. The credit card issuer may reopen it if you call and ask. Or worse, that could require you to put in a new application.

Though you may opt to use your debit cards more often because you don’t want problems with your credit card issuer, don’t forget that you need open, active credit cards to help boost your credit score.

You don’t have to carry a credit card balance to build a good credit score. If your credit card has $0 balance, use it once every few months to keep it open and active. You can avoid finance charges by paying the balance off at the end of the month. You can keep from spending extra money by using your credit card to buy something you would have paid cash for and then paying off the balance immediately.

When It’s Better to Use a Debit Card

There’s one time that using a debit card trumps a credit card – to get cash from an ATM. Credit card cash advances are one of the most expensive types of transactions, with interest accruing from the first day you take out the cash advance. Though you’re subject to an ATM fee with both types of transactions, only a credit card cash advance charges a cash advance fee. If you need cash, use your debit card. But, for purchases, it’s ok to use your credit card.

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