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Only having a debit card can actually hurt your credit—here's how
While credit and debit cards are completely different, only having one may have an effect on the other. CNBC Select explains how.
When it comes to comparing credit cards to debit cards, know that the two are entirely different.
When you use your debit card, your money is withdrawn directly from your checking account. But since debit cards are not a form of credit, your debit card activity does not get reported to the credit bureaus, and it will never show up on your credit report or influence your score in any way.
Yet while the two are separate, having only a debit card and no credit card at all can actually have an impact on your overall credit report — and it may not be positive.
Below, CNBC Select tells you why.
Debit cards don't show how you use credit
Only owning a debit card can certainly get you by. You can make everyday purchases on your debit card and know that because the money is coming directly from your account, you have the cash to pay for your expenses.
But when you're ready to take out a mortgage or any type of loan (a car loan, a student loan), lenders will want to see how you handle credit, or borrowed money. If you have no history of credit whatsoever, it will be harder for them to judge whether or not you are a risk to lend money to.
Credit rating agencies will also look to your credit history — whether you paid past credit accounts on time, your available credit and how much of it you use — when calculating your credit score. If they see you do not have any credit history with one of the three main credit reporting agencies, Equifax, Experian or TransUnion, you will appear "credit invisible."
In this case, "you may not be awarded credit or the credit may be at unfavorable terms," Shon Anderson, a certified financial planner and president at Anderson Financial Strategies, tells CNBC Select.
"I had a friend in college that was proud of his strategy to not have any credit card debt by purposely not ever having had a credit card," he says. "To his surprise, after graduating and working as an engineer with a good salary, he was not able to obtain a car loan due to his credit profile."
Credit cards have benefits that you don't get with debit cards
Credit cards typically offer benefits beyond just acting as a loan of money. Many come with extended retail warranties, rental car insurance, travel coverage, purchase protection, Global Entry credits and, not to mention, all their various rewards, such as earning cash back when you spend.
But if you want to really take advantage of credit cards, be sure you pay them off.
"There is the behavioral aspect that could make owning a credit card detrimental to your financial well-being," Danielle Harrison, a certified financial planner in Columbia, Missouri, tells CNBC Select.
Harrison, like all other credit experts, recommends that credit cardholders make sure they pay off the balance in full and on time so they don't ever accrue interest. Keep your balances small by only charging what you know you have in your bank account to afford. Do this and you won't spend beyond your budget with a credit card.
Regardless of the extra bells and whistles that come with having a credit card, it's important to use one to build a credit history. That way, you can qualify for some of life's major milestones, such as buying a car or a home one day.
If you're ready to apply for your first credit card, take a look at CNBC Select's best credit cards for building credit. The Petal® 2 "Cash Back, No Fees" Visa® Credit Card, issued by WebBank, is a unique card that takes a different approach to the credit card application process. Instead of judging your creditworthiness solely based on credit history, Petal may ask you to link bank accounts during the application process. Then, WebBank uses Petal's technology to analyze your bank statements and other data, such as bill payments and earnings, to determine your eligibility.
This is especially beneficial for applicants who may not have any credit history. But if you do have a credit history, it will always factor into the credit decision.
The Petal 2 Visa Credit Card has no fees whatsoever* and doesn't require a security deposit (which most secured credit cards for credit beginners do). It also offers a rewards program with 1% cash back on eligible purchases right away, which can increase to 1.5% cash back after you make 12 on-time monthly payments. This is not only a nice perk, but a great way to encourage great credit card habits. Cardholders also receive 2% to 10% cash back from select merchants.
Petal 2 Visa Credit Card issued by WebBank.
The regular APR variable for the Petal® 2 "Cash Back, No Fees" Visa® Credit Card currently range from 17.74% - 31.74%