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Debunking credit card myths: Is a debit card better for your credit history?

Jan. 22, 2021
5 min read
Man holding credit card while using digital tablet in the office.
Debunking credit card myths: Is a debit card better for your credit history?
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It’s no surprise that travel rewards credit cards are a popular discussion here at TPG. By strategically opening and utilizing them, you can earn large sign-up bonuses and extra points in a variety of categories of everyday spending, opening up fantastic redemptions like premium-class flights and luxurious hotel rooms.

However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation.

Today, I’ll continue looking at your credit score and debunk a common myth when it comes to debit versus credit cards.

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Myth: A debit card is better for building your credit history than a credit card

Many beginners to the world of cards prefer to use a debit card as opposed to a credit card for the majority of their transactions.

While this may be rooted in fear of the unknown, it also may be simple recognition of the dangers of a credit card. When you open a new card and get a credit limit of $20,000, that’s not just free money. You may not trust yourself with a large line of credit and instead, rely on the immediacy of a debit card. After all, there’s no “buy now, pay later” aspect of a debit card. That money comes out of your bank account (almost) immediately.

Unfortunately, there’s an important misconception when it comes to debit cards: These products do not have any impact on your credit score.

This should be clear simply through semantics; why would a debit card impact your credit score? Nevertheless, I’ve heard from many beginners asking this exact question, so it’s clearly still on people’s minds.

Related: Why a credit card is a smarter choice than a debit card

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At its most basic level, your credit score is a numerical representation of how well you manage lines of credit that have been extended to you. As we’ve covered in previous debunking myths stories, it’s made up of five factors:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Types of credit used

Remember too that these are not equals, as some are weighted more heavily than others:

The factors that make up your FICO score. (Image source: FICO)

As you can see, none of these apply to a debit card. There’s no “payment history” on those accounts since every transaction comes out of your bank account individually. You’ll never owe any amount on a debit card, and since there isn’t any type of credit line extended to you, the last three factors don’t come into play either.

Related: How credit scores work

Unfortunately, over-relying on a debit card can come back to haunt you when you’re looking to finance a new car or buy your first house or even apply to rent an apartment (where the landlord or leasing company runs your credit). If your credit history is minimal or even non-existent, you may run into difficulties securing these types of loans. Even if you do secure them, you may be charged higher interest rates due to the fact that the lender isn’t sure of your creditworthiness.

All of this can be avoided by opening and utilizing a credit card. I’d recommend starting with a no-annual-fee card such as the Chase Freedom Unlimited or Citi® Double Cash Card so you won’t have to “invest” anything right off the bat. These also offer simple rewards for every purchase your make.

You’ll want to carefully set boundaries for your spending so as not to rack up a huge bill, and be sure to pay off the balance in full every month. Even just a handful of transactions each statement period will demonstrate to the credit bureaus that you are responsibly managing your available credit, improving your credit score and making you more attractive to issuers down the road.

Related: Ten commandments for rewards credit cards

Bottom line

Debit cards often seem like a safer payment method than credit cards, since you aren’t at risk of overextending yourself. The money comes out of your account right away, preventing a large bill at the end of the month that will accrue interest charges at a very high rate.

However, using a debit card won’t have any impact on your credit score, making it more challenging to obtain loans in the future. While you should always stay within the limits of what you can afford to actually purchase and pay for each month, a credit card should play at least some role in your financial strategy.

Additional reporting by Chris Dong.

Featured image by Getty Images
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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Cons

  • Steep annual fee
  • Difficulty meeting $15,000 welcome offer for smaller businesses
  • Limited high-bonus categories outside of travel
  • The Points Guy Exclusive Offer: Earn 150,000 Membership Rewards® points after you spend $15,000 on eligible purchases with the Business Platinum Card® within the first 3 months of Card Membership.
  • Get 5X Membership Rewards® points on flights and prepaid hotels on amextravel.com, and 1X points for each dollar you spend on eligible purchases.
  • Earn 1.5X points (that’s an extra half point per dollar) on eligible purchases at US construction material & hardware suppliers, electronic goods retailers and software & cloud system providers, and shipping providers, as well as on purchases of $5,000 or more everywhere else, on up to $2 million of these purchases per calendar year.
  • Unlock over $1,000 in annual statement credits on a curation of business purchases, including select purchases made with Dell Technologies, Indeed, Adobe, and U.S. wireless service providers.
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TPG Exclusive Offer
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TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

5XGet 5X Membership Rewards® points on flights and prepaid hotels on amextravel.com
1.5XEarn 1.5X points on eligible purchases at US construction material & hardware suppliers, electronic goods retailers and software & cloud system providers, and shipping providers, as well as on purchases of $5,000 or more everywhere else, on up to $2 million of these purchases per calendar year
1X1X points for each dollar you spend on eligible purchases.
  • Intro Offer
    The Points Guy Exclusive Offer: Earn 150,000 Membership Rewards® points after you spend $15,000 on eligible purchases with the Business Platinum Card® within the first 3 months of Card Membership.

    Earn 150,000 points
    120,000 points
  • Annual Fee

    $695
  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    670-850
    Good, Excellent

Why We Chose It

It's hard to find a card that competes with the mile-long list of benefits that come with the Amex Business Platinum. While it's certainly not the card for the average consumer, a business owner with tons of expenses -- especially related to travel -- will find this card incredibly valuable. This card is similar to the consumer version that Amex offers, but with more business-oriented perks around statement credits and earning rates that are a better fit for business owners.

Pros

  • An up to $100 credit for Global Entry or TSA PreCheck application fee every four to five years
  • Up to $400 annual credit for eligible U.S. Dell purchases (enrollment required)
  • Gold status at Marriott and Hilton hotels (enrollment required)
  • Access to the Fine Hotels & Resorts program and Hotel Collection
  • Extended warranty protection
  • International Airline Program and Cruise Privileges Program

Cons

  • Steep annual fee
  • Difficulty meeting $15,000 welcome offer for smaller businesses
  • Limited high-bonus categories outside of travel
  • The Points Guy Exclusive Offer: Earn 150,000 Membership Rewards® points after you spend $15,000 on eligible purchases with the Business Platinum Card® within the first 3 months of Card Membership.
  • Get 5X Membership Rewards® points on flights and prepaid hotels on amextravel.com, and 1X points for each dollar you spend on eligible purchases.
  • Earn 1.5X points (that’s an extra half point per dollar) on eligible purchases at US construction material & hardware suppliers, electronic goods retailers and software & cloud system providers, and shipping providers, as well as on purchases of $5,000 or more everywhere else, on up to $2 million of these purchases per calendar year.
  • Unlock over $1,000 in annual statement credits on a curation of business purchases, including select purchases made with Dell Technologies, Indeed, Adobe, and U.S. wireless service providers.
  • $200 Airline Fee Credit: Get up to $200 in statement credits per calendar year for checked baggage fees, lounge day passes, and more at one selected airline.
  • $189 CLEAR® Credit: Use your Card and get up to $189 back per year on your CLEAR® membership. CLEAR® is available at more than 50 U.S. airports and stadiums.
  • The American Express Global Lounge Collection® can provide an escape at the airport. With more than 1,400 airport lounges across 140 countries and counting, you have more lounge location options than any other credit card on the market as of 9/2021.
  • $695 Annual Fee.
  • Terms Apply.