Should I Use a Credit Card or Debit Card to Improve My Credit Score?

Dear COD,

Debit cards are not credit accounts, so debit card transactions are not reported to the credit reporting companies. Therefore, debit cards have no impact on your credit scores.

When you make a purchase with a debit card, the money comes directly out of the available funds in your checking account. Checking account information is also not part of your credit history.

With a credit card, an individual receives a credit limit and purchases are made by borrowing money from the lender with the promise to repay the debt as agreed. Lenders can then report that account information to any of the three national credit reporting companies (Experian, TransUnion and Equifax).

How Does a Credit Card Build Credit?

Credit cards give you some freedom to decide how much you will charge and how much you will repay each month, so how well you manage them gives your lenders unique insight into your creditworthiness.

The most important factor in credit scores is your payment history. Late payments remain on your credit report for seven years, and even a single missed payment will almost certainly affect your scores negatively. Paying your bills on time is key to having good credit scores. Having a credit card account on your report with a positive payment history tells lenders that you may be more likely to pay future debts as agreed.

The second most important factor in credit scores is your credit utilization ratio, also known as your balance-to-limit ratio. Your utilization rate is calculated by taking the total of all your credit card balances and dividing that number by the total of all your credit limits. Credit experts recommend keeping your utilization rate below 30%, but below 10% is best for your scores.

Ideally, you should pay your credit card account balances in full each month. Doing so will help you avoid accumulating debt and paying interest fees. Keeping your credit card balances low shows lenders that you know how to manage credit responsibly.

How Can I Improve My Credit Scores?

If you are trying to increase your credit scores, it's a good idea to order copies of your credit report from each of the three credit reporting companies as well as your credit score.

You can get your free credit score directly from Experian, and with it you will receive a list of the risk factors that are currently impacting your scores the most. By focusing on improving those risk factors specifically, you can begin improving your credit scores.

There are also some basic steps anyone can take to begin improving their creditworthiness, such as:

• Bring past-due accounts current. If you have any delinquent accounts on your credit report, bring them current as soon as possible and be sure to make all payments on time going forward.
• Pay off any outstanding debts. If you have outstanding debts, such as collection accounts, paying them off can benefit your scores right away. Some of the newer credit scoring models now exclude paid collection accounts from their calculations.
• Reduce credit card balances. As mentioned above, your utilization rate is a major factor in your credit scores, which means paying down or paying off your credit card balances can help your scores.
• Sign up for Experian Boost. Experian has a free feature called Experian Boost that can help you improve your credit scores instantly by adding your on-time utility, cellphone and streaming service payments to your Experian credit report. You will receive an updated FICO Score once the payments are added so you can see how much your score may have increased.

What if I Don't Have a Credit Report Yet?

If you don't yet have any credit accounts in your name, you can create your credit report with Experian and begin building your credit history right away using Experian Go. Simply download the Experian app and enroll in Experian's free membership to get started.

Thanks for asking.

Jennifer White, Consumer Education Specialist