Living in an almost cashless society means using bank cards is a normal part of life. But how do you decide whether to get a debit or credit card? Do they affect your credit score in the same way? These are all questions you can ask yourself when signing up for a new account. In this article, we’re talking about both debit and credit cards and whether they make any difference towards your credit score. Read on to find out. Not sure about the ins and outs of credit scores? Head to this guide to get the lowdown.
What’s the difference between debit and credit cards?
Debit cards are directly linked to your bank balance. You only spend what’s in your account (plus any agreed overdraft, but more on that later).
On the other hand, credit cards are a way of borrowing money within set credit limits and repayment terms that you agree with the provider. Spending on a credit card means the card issuer covers the cost until you repay it, often with high interest. Therefore, it’s possible to spend beyond your means with a credit card.
So, debit cards are different from credit cards in that you’re spending your own money rather than borrowing money from the card issuer as you would with a credit card. As a result, using a debit card isn’t reported to Experian, Equifax or TransUnion and does not influence your credit report. Even if you have multiple debit cards with different bank accounts, your debit card transactions alone won’t affect your credit score. This also means you don’t need a credit score in order to get a debit card (while you do for a credit card).
However, money you spend on a credit card is borrowed from the card issuer and has to be paid back. Because that money is provided on credit, your usage is reported to the credit reference agencies and can positively or negatively impact on your credit score, depending on how you manage it. Find out more about how missed payments affect your credit score here.
Can debit cards affect your credit score?
Not directly, but using your debit card responsibly and within your means can indirectly improve your chances of getting credit in the future.
Managing your finances well and not misusing your overdraft can demonstrate to potential lenders that you’re financially responsible. They may consider this when assessing if you can handle credit.
This is because an overdraft is a form of borrowing money and you get into debt by using it. If you overdraw without authorisation or exceed your agreed limit, this will show up on your credit report and can affect your credit score negatively.
Another way your debit card could indirectly affect your credit scores is by borrowing what you can’t afford using buy-now-pay-later services like Klarna. If you fall behind on your payments, this can appear on your credit report and significantly impact your credit scores.
But it is important to say that the impact of using your debit card alone will be minimal. If you want a card which improves your credit score, you might want to consider a credit card.
How do I use my credit card to improve my credit score?
It can do. But it depends on how much you borrowed. When you borrow on a credit card, you have a minimum monthly repayment to make. If your minimum monthly payments pretty much cover what you borrowed that month, it won’t hurt your credit score.
But you have to be careful with credit cards, too! While they have a great impact on your credit score when managed well, if you have any problems or miss payments you can be stung with high interest rates that can spiral your debts quickly. It’s important to be confident you’re ready for a credit card.
Be mindful of how many credit cards with high limits you have as it can work against you. It could suggest that you’ve got too much borrowed money and you’re struggling with your finances. It is a good idea to keep your borrowing across all of your accounts under 25% of your available limit (this doesn’t include mortgages).
You can expect your credit score to be positively affected about three months after you start using a credit card, assuming you’ve used it for regular purchases that you can afford to pay off in full (food shopping, fuel, and commuting costs are some common examples). Also, credit cards you’ve managed responsibly for a long time will look great on your credit score.
Does paying the minimum balance on my credit card affect my credit score?
No, because debit cards don’t involve using credit, they are a financial product that banks and building societies can offer to you to help you withdraw and deposit your cash in a branch.
However, if you are using most of what you can borrow on your credit card but you are only ever making the minimum repayments every month, creditors might guess that you are struggling with your finances.
And if you miss your monthly minimum balance your credit score can plummet, you could be hit with fees and in the worst case scenario be landed with a default or a county court judgment (CCJ). Missed payments stay on your credit file for six years (eek)!
Does not using my credit card affect my credit score?
You might stop using your credit card once its promotional benefits have passed or when the balance has been paid off. But using credit cards responsibly is one of the best ways to build your credit score.
After a long period of inactivity, your card issuer may close the account. If you don’t want that to happen (and if it’s your oldest credit card, it’s better not to close it) — just be mindful of keeping an eye on it to ensure you’re avoiding fraud on inactive accounts, which are often targeted.
However, if you have mature credit cards with great payment records they will do wonders for your credit score so maybe you’d benefit from using, rather than cancelling, them?
How can I improve my credit score without a credit card?
Credit cards can be a great way to balance your finances or make useful purchases quicker than you’d otherwise be able to afford. But it depends if you can keep up repayments and resist the temptation to overuse credit.
A Loqbox membership is a simple way to grow your credit score without having to commit to a credit card. Find out everything you need to know about joining here.
Improvements to your credit score are not guaranteed. Your other financial behaviour counts too, read this list of what affects your scores and how to improve them to find out more.
Find out your score(s)
Your credit scores represent your credit reports and give you an idea of how a lender would view them. It’s a myth that you have a universal credit score, because in fact, you actually have three.
These three scores are generated by the top three credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion.
You can check your credit scores with all three CRAs, for free and without impacting them, using these sites:
ClearScore (uses Equifax data)*
Experian App (uses Experian data)
Intuit Credit Karma (uses TransUnion data)
*For transparency, we wanted to let you know that ClearScore pay us a small commission if you sign up using this link.
Ideally, you want your credit scores to be as high as possible because that will generally mean you are more likely to be able to take out lines of credit and could improve the interest rates you are offered.
But credit scores fluctuate depending on how you manage your borrowing. So it’s valid to be asking yourself “how can a debit card affect your credit score?”
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