QUESTION: Will a debit card help build better credit scores?

ANSWER: No.

Even though the debit, or ATM, card that is linked to your checking account has a Visa or MasterCard logo on it, it is not an actual credit card.  Because the money comes out of your bank account and no credit is actually extended or loaned to you during the transaction, there is nothing to report on your credit file.  Only accounts that are on your credit report are included in your credit score.

NOTE: If you have a bank account that goes delinquent with bounced checks or overlimit fees, it can eventually end up in collections and show up on your credit as a negative item.

USING A DEBIT CARD AS A CREDIT TRANSACTION
When you swipe your debit card for a purchase and enter your Personal Identification Number (PIN) it becomes an "online" transaction, is completed electronically and quickly, and costs the retailer where you're shopping about 10 cents to process.

When you choose to use your debit card as a credit transaction, signing the receipt without using your PIN, it becomes an "offline" transaction.  It takes a bit longer to process and costs the retailer about 2% of the purchase price.

BEWARE
When you choose to use your debit card as a credit transaction, it can take a bit longer for the money to leave your account.  However, because the gas pump you're at does not know ahead of time how much fuel you're going to buy, the system "authorizes" an amount, perhaps $50 to $75, which is then blocked or set aside in your checking account.  If you only pump $20 worth of gas with your debit card as a credit transaction, it can take a few days for the process to be completed and you may not be able to access the additional $30 to $45 that was set aside for the authorized fuel purchase.  In some instances, this has led to consumers bouncing checks and getting hefty fees even though they had money in their account.

Using the PIN number and making it a debit transaction means it gets processed quicker with the exact amount coming out of your account, rather than a hold put on a chunk of your money.

FRAUD PROTECTION
Always protect your PIN number by covering up the keypad when punching it in.  Thieves do use binoculars and hidden cameras and if they get access to your bank account, you could be left with no money.

If your credit card is stolen and/or used fraudulently, you are usually only liable for up to $50 of the charges.  Furthermore, the banks money was stolen, not yours.

If your debit card is used fraudulently, it can add up to hundreds of dollars in bounced check fees and late fees with the companies that couldn't cash your checks.

Your liability is only $50 if you report the unauthorized use within two business days of discovering it.  However, if you don't report the loss within two business days after you discover it, you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. That means you could lose all the money in your bank account and the unused portion of your line of credit established for overdrafts.   You can find more information here at the Federal Trade Commission's website.

FINAL THOUGHTS
Be sure to practice identity theft prevention to protect yourself and your personal information.  When you are ready to add credit building to your Personal Financial Fitness plan, be aware that debit cards and cash transactions are not going to help your grow your credit scrores.  You can get your own Credit Building Plan from us, starting at only $100, and learn how to use your existing account as credit building tools to increase your credit rating.