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Debit cards don’t build credit because they use your own funds instead of borrowing money from a lender. Credit is the borrowing of money, often via a credit card or loan. You then pay it back as agreed with interest. There are some new cards that break this mold. These new cards are also linked […]

Debit cards don’t build credit because they use your own funds instead of borrowing money from a lender. Credit is the borrowing of money, often via a credit card or loan. You then pay it back as agreed with interest.

There are some new cards that break this mold. These new cards are also linked to your bank account, just like traditional debit cards.

Instead of withdrawing funds from your account immediately after the purchase, the debit-card issuer pays the costs and then withdraws the money the following day from your bank. These transactions will be reported to credit bureaus as repayments. You can build credit by doing this without having to take on huge debts.

You can also improve your credit rating or establish a credit history by using other methods. In this article, we’ll discuss some of them.


How to build credit

We’ll look at some options to help you establish credit, if your credit history is limited or non-existent.


Open up a secured credit cards

Consider a secured card if your lack of a credit history makes it difficult to open a regular card. Secured cards have a similar application process to traditional credit cards, but they require that you deposit money in a separate account. This amount is usually between $50 and $300. The amount of the deposit is used to establish a credit limit. A secured card will help you build your credit as long as the issuer of the card reports to the credit bureaus that you have a good payment history.

You can convert many secured cards to traditional credit cards later. Ask your provider about this option before you open a secured card.


Get a co-signer

You may need a cosigner if you are building credit from scratch. This could be to get a credit card, or to take out a conventional loan. If you have a cosigner with good credit, your application may be more appealing to credit card companies and lenders.

Remember that adding a second signer will make them responsible for the debt as well. Before making a decision, you should ensure that the person who will be co-signing your debt is aware of the obligations.


Become an authorized user

You can also build your credit by becoming an authorized card user. This is best done with a family member or trusted friend who has a good credit rating. If the person fails to pay, this information will be added to your credit report.

Authorized users can get a card in their name, which is linked to the account of the primary cardholder. Some credit card companies include your name in the information they report to credit bureaus about the main account. Some companies will do this but not all, so make sure to research the company before you become an authorized user.


Credit-Builder Loans

A credit-builder is another way to improve your credit score. A 2020 Consumer Financial Protection Bureau report found that borrowers with no debt experienced the greatest benefits when using this type credit-building product.

Credit-builder loans are different from traditional loans, which allow you to borrow money upfront. Instead, you must pay a set amount or pay the entire loan before you can use the funds. These loans are usually smaller than traditional ones, but you still may have to pay interest. However, you can begin building your credit rating.

Credit Karma’s Credit Builder Plan helps you build credit and save money at the same. After you decide how much money you’d like to save, it is deposited in a locked account. You then make monthly payments. Once you have at least $500 in savings, you can start spending the money.


Rent-reporting services

Addition of alternative data can help you build your credit. Rent reporting services such as LevelCredit help report rent payments to credit bureaus. However, some programs do not report all of your payments.

This strategy will only work if you pay your rent regularly and on time. Missed rent payments can have a negative effect on your credit.


Establishing healthy credit habits

You should always check your credit report for errors. You can request your credit reports free of charge every 12 months at annualcreditreport.com. Don’t worry – this won’t affect your credit.

You can also take other steps to improve your credit score and history.

  1. Pay your bills on time. The payment history you have is an important factor in determining the health of your credit score. You should have a system to pay your bills in a timely manner. This could be as simple as setting up reminders in your phone or marking the due date in your calendar. Just because a credit account is not reported to credit bureaus does not mean that it cannot affect your credit. A collection agency can also damage your credit if an overdue invoice is sent.
  2. Maintain a low credit utilization. Credit utilization is the percentage of available credit you are using. This is an important factor when determining credit scores. People who are too close to or exceed their credit limit may find it difficult to repay in the future. Try to only use a small portion of your credit limit — preferably no more than 30%.
  3. Do not open multiple credit accounts in the same time period. While a variety of credit accounts will help you build your credit score, opening too many accounts at once can negatively impact your scores.
  4. Open your credit accounts. Even though the length of your history does not have as big an impact on your score as your payment history and credit utilization do, it is still a factor that you should be aware of. The length of your credit history includes the number of years you have used credit and how long specific accounts have been open.


Next Steps

Debit cards do not build credit in general. However, there are some new debit cards that claim to be able to. These cards are relatively new.

If you have no credit history, the best way to build credit is by getting a secured card, taking out an unsecured loan or becoming an authorized cardholder.

Before signing up for a credit building product or service it is advisable to research the company to avoid any unpleasant fees, hidden charges or scams.