How Debit & Credit Cards Affect Your Credit Score

How much do you understand about using debit and credit cards? Will it hurt your credit score to close out a credit card? Does using a debit card help you build your credit? We’ve got the answers to help you take charge of your credit.

First, it’s important to know what’s involved in a good credit score. The most important credit score when you’re trying to get financing for a loan like a mortgage or an auto loan is the FICO score. The FICO score is based on the way you manage your credit, and takes into account the following factors:

  • Payment History: Paying bills on time is important because this makes up 35 percent of your credit score.
  • Credit Utilization: This makes up 30 percent of your credit score, and it’s based on how much of your credit you’re using. It’s generally recommended to use only about 30 percent of your available credit.
  • Length of Credit History: Accounting for 15 percent of your credit score, this is the reason many people don’t want to close credit card accounts. The longest-held accounts help your score more than new accounts, because they give a better indication of your payment pattern.
  • New Credit: Ten percent of the score has to do with new accounts, so try not to apply for a lot of credit in a short period of time.
  • Mix of Credit: The final ten percent involves your mix of different credit accounts like credit cards, retail accounts, finance company accounts, mortgage loans, and installment loans. A good balance looks good for your credit score.

To improve credit score numbers, consider all of those factors. But as you can see, some count more heavily than others when a lender needs to check credit score ratings to determine your eligibility for a loan. For instance, canceling a credit card is probably not going to have too big of an impact, unless it greatly reduces your amount of credit and raises your credit utilization significantly. If you must cancel a card, cancel a newer card with a lower limit, so that your length of credit history is not dramatically impacted, and your credit utilization doesn’t change very much.

What about debit cards? Do they impact your credit? In a word, no. Because debit cards draw directly from your bank account, they don’t give an indication of how you use credit. Even if you use your debit card as a credit card, it’s not a form of credit. Credit cards also offer some advantages that debit cards don’t, such as reward points. If you can responsibly manage a credit card, it’s best to use that as a form of payment for establishing credit, since your debit card won’t have an effect on your score.

At First Coast Mortgage Funding, we offer creative solutions to help borrowers improve credit and overcome roadblocks when trying to secure home financing. Committed to helping people in the First Coast region buy and refinance residential properties, we specialize in every kind of property, working to provide home loans to our clients at the lowest interest rates, with the best possible service. Contact us through our website or call 904.770.5000 for more information.