When it comes to comparing credit cards to debit cards, know that the two are entirely different.
When you use your debit card, your money is withdrawn directly from your checking account. But since debit cards are not a form of credit, your debit card activity does not get reported to the credit bureaus, and it will never show up on your credit report or influence your score in any way.
Yet while the two are separate, having only a debit card and no credit card at all can actually have an impact on your overall credit report — and it may not be positive.
Below, CNBC Select tells you why.
Debit cards don't show how you use credit
Only owning a debit card can certainly get you by. You can make everyday purchases on your debit card and know that because the money is coming directly from your account, you have the cash to pay for your expenses.
But when you're ready to take out a mortgage or any type of loan (a car loan, a student loan), lenders will want to see how you handle credit, or borrowed money. If you have no history of credit whatsoever, it will be harder for them to judge whether or not you are a risk to lend money to.
Credit rating agencies will also look to your credit history — whether you paid past credit accounts on time, your available credit and how much of it you use — when calculating your credit score. If they see you do not have any credit history with one of the three main credit reporting agencies, Equifax, Experian or TransUnion, you will appear "credit invisible."
In this case, "you may not be awarded credit or the credit may be at unfavorable terms," Shon Anderson, a certified financial planner and president at Anderson Financial Strategies, tells CNBC Select.
"I had a friend in college that was proud of his strategy to not have any credit card debt by purposely not ever having had a credit card," he says. "To his surprise, after graduating and working as an engineer with a good salary, he was not able to obtain a car loan due to his credit profile."
Credit cards have benefits that you don't get with debit cards
Credit cards typically offer benefits beyond just acting as a loan of money. Many come with extended retail warranties, rental car insurance, travel coverage, purchase protection, Global Entry credits and, not to mention, all their various rewards, such as earning cash back when you spend.
But if you want to really take advantage of credit cards, be sure you pay them off.
"There is the behavioral aspect that could make owning a credit card detrimental to your financial well-being," Danielle Harrison, a certified financial planner in Columbia, Missouri, tells CNBC Select.
Harrison, like all other credit experts, recommends that credit cardholders make sure they pay off the balance in full and on time so they don't ever accrue interest. Keep your balances small by only charging what you know you have in your bank account to afford. Do this and you won't spend beyond your budget with a credit card.
Bottom line
Regardless of the extra bells and whistles that come with having a credit card, it's important to use one to build a credit history. That way, you can qualify for some of life's major milestones, such as buying a car or a home one day.
If you're ready to apply for your first credit card, take a look at CNBC Select's best credit cards for building credit. The Petal® 2 "Cash Back, No Fees" Visa® Credit Card, issued by WebBank, is a unique card that takes a different approach to the credit card application process. Instead of judging your creditworthiness solely based on credit history, Petal may ask you to link bank accounts during the application process. Then, WebBank uses Petal's technology to analyze your bank statements and other data, such as bill payments and earnings, to determine your eligibility.
This is especially beneficial for applicants who may not have any credit history. But if you do have a credit history, it will always factor into the credit decision.
The Petal 2 Visa Credit Card has no fees whatsoever* and doesn't require a security deposit (which most secured credit cards for credit beginners do). It also offers a rewards program with 1% cash back on eligible purchases right away, which can increase to 1.5% cash back after you make 12 on-time monthly payments. This is not only a nice perk, but a great way to encourage great credit card habits. Cardholders also receive 2% to 10% cash back from select merchants.
Don't miss:Prepaid card vs. debit card: What's the difference?
Petal 2 Visa Credit Card issued by WebBank.
The regular APR variable for the Petal® 2 "Cash Back, No Fees" Visa® Credit Card currently range from 18.24% - 32.24%
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Your debit card could potentially affect your credit score if you overdraft, that fee goes to collections, and that collection account then gets reported to the credit bureaus, says Todd Christensen, education manager for Money Fit, a debt management nonprofit and author of “Everyday Money for Everyday People.”
Can a debit card ruin your credit? ›
But since debit cards are not a form of credit, your debit card activity does not get reported to the credit bureaus, and it will never show up on your credit report or influence your score in any way.
Is it bad to only use a debit card? ›
Credit cards often offer better fraud protection
With a credit card, you're typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used. You could be liable for much more for unauthorized transactions on your debit card.
Can you have a credit score with only a debit card? ›
To recap, in general, debit cards don't build credit because your payment activity isn't reported to the bureaus. But some financial companies are changing the landscape with debit card features designed to help you add positive payment information to your credit reports.
What is worse losing a debit card or credit card Why? ›
Nearly all of today's top credit cards offer zero fraud liability on unauthorized charges, which means you won't owe a penny on any charge determined to be fraudulent. Debit cards also limit your fraud liability but require you to report your lost or stolen card within two business days to limit your liability to $50.
Why is a debit card a bad idea? ›
While credit cards can carry high-interest rates, debit card purchases can cause you to pay exorbitant fees if you aren't paying attention. Debit card transactions are deducted straight from your checking account. If your purchases end up overdrawing your account, you'll face substantial overdraft fees.
What is the major disadvantage of using a debit card? ›
Some ATMs will charge withdrawal fees, and if you use more than the agreed overdraft limit then the fees tend to be much greater than those incurred by credit card usage. Another disadvantage of debit cards is the fact that they have limited funds, which can slow down business.
Does withdrawing cash from a debit card affect credit score? ›
Debit cards are not usually considered a form of credit: You use money you have in your account to withdraw cash or make purchases with a debit card. As such, most debit cards don't get reported to the credit bureaus, meaning the account won't appear on the credit reports used to calculate your credit scores.
What is the best debit card to have? ›
Best debit cards that offer cash back in 2024
- Discover® Cashback Debit Account.
- Axos CashBack Checking Account.
- Upgrade Rewards Checking Plus.
- LendingClub Rewards Checking Account.
- ONE account.
- Venmo.
- Dave Spending Account.
- Primis Perks Checking.
Your credit score is not directly affected by your checking and savings account activity. That includes account closures. Checking and savings accounts are not considered credit accounts.
Fraudsters can still use your debit card even if they don't have the card itself. They don't even need your PIN—just your card number. If you've used your debit card for an off-line transaction (a transaction without your PIN), your receipt will show your full debit card number.
What is the biggest con to using a debit card? ›
If you overspend, you could get hit with costly overdraft fees: If charges to your debit card cause your checking account balance to go negative, you could suffer overdraft fees and other steep charges that far exceed the potential costs of using a credit card.
What happens if I never use my debit card? ›
Will my debit card close if I don't use it for a long period of time? No, your debit card is linked to your bank account so as long as your bank account is open your debit card will be active. However, your debit card will expire - your bank will just send you a new one when this happens.
Is it bad to run a debit card as credit? ›
But depending on your bank, running a transaction as credit may provide you with stronger fraud protection for unauthorized transactions. Regardless of how you use your debit card, it's wise to check your account regularly to track your payments and to ensure there are no errors or fraud.
Does having a negative debit card affect credit score? ›
Because checking accounts aren't a type of credit, they don't appear in your credit reports or affect your credit scores, and neither do overdrafts. However, if you don't resolve your overdraft and the account goes into collections, that could affect your credit scores.
Does debit affect credit effect? ›
In effect, a debit increases an expense account in the income statement, and a credit decreases it. Liabilities, revenues, and equity accounts have natural credit balances. If a debit is applied to any of these accounts, the account balance has decreased.
Can debit cards go negative? ›
It can happen to anyone: You may eventually find yourself with a negative balance in your bank account from overspending. When a transaction exceeds your available balance1, the bank may choose to cover that transaction for you. This leaves you with a negative balance and is known as an overdraft.
