Having a good credit score is essential for securing financial products such as loans, credit cards, and mortgages. Your credit score is a measure of your creditworthiness. It’s what lenders use to determine if they should trust you and lend you money – so it’s kind of a big deal.
You build credit over time, by managing your money well, by applying for and using credit responsibly, and by repaying your debts in a timely manner.
So, where do debit cards fit into the picture when it comes to building credit? Can they hurt or help your credit score? Let’s find out.
What is a Credit Score and How is it Calculated?
Your credit score represents how creditworthy you are – that is to say, how worthy are you to lend credit to. Your score is based on a variety of factors related to how you borrow and repay debts over time. Credit scores range from 300 to 900. The better your score, the more likely you are to be offered a mortgage, receive higher credit card limits, and get better interest rates on loans.
In Canada, your credit score is considered “excellent” if it’s above 760, “good” between 660-759, and “poor” to “fair” if it’s below 659. The aim of the game is to get your score up into the “good” and “excellent” rankings.
When you borrow money, your borrowing and repaying are reported by the lenders to the two consumer credit bureaus in Canada, Equifax and TransUnion. If you borrow responsibly and repay your debts on time, you will have positive interactions reported, and if you miss payments or borrow more than you should, those items are reported as negative. The credit bureaus keep track of your borrowing behaviour, which make up your credit history and, ultimately, your credit score. Credit scores are typically updated every 30 days or so. Items in your credit score – particularly negative items – can stay on your credit report for up to seven years.
If you’re looking to build or rebuild credit, it’s important to understand what goes into defining your credit score. As a rough guide, the credit bureaus apply about one-third of your score weighting to your payment history (how well you repay money you owe), about one-third of your score for the amount you owe (including your credit utilization), and about one-third to your credit mix, credit applications, and the length of your credit history.
Credit Building Tips for Beginners
Building a good credit history is crucial for your long-term financial success. With good spending and saving habits, you can build your score. These tips will help you on the right path.
Pay your bills on time and in full
Get into and maintain a habit of paying your debts on time and in full. Ensure you’re making your minimum payments, if nothing else, although try to also pay down your loans. If you need to, set reminders for yourself to pay your bills, and make sure you always have enough in your account to cover automatic payments.
Keeping low balances on credit cards
Credit bureaus typically want to see you carry less than 30% credit utilization. Your credit utilization is the amount of credit you’ve used compared to what you have available to you. For example, if you have a credit card with a $2000 limit and you owe $1000 on it, you’ve utilized 50% of that credit.
Maintain a mix of credit types
The bureaus also like to see you have a good credit mix. Usually, this means having both revolving credit and installment credit. An example of revolving credit would be a credit card, with a limit you can borrow and repay as you wish. Installment credit is, for example, a loan like a student loan, car loan, or mortgage, which you need to pay down in established installments. Having both types of credit in the mix shows lenders you can manage different kinds of debt.
Avoid applying for new credit too frequently
When you apply for credit too often, it looks to lenders as though you are unable to live within your means. If you always need to borrow money, it might suggest you’re not able to manage your own money successfully. Apply for credit sparingly, when you need it.
Check your credit reports regularly
You can access your own credit reports to know where you stand and ensure there are no errors that might be affecting your score. If your credit score is poor, you’ll also be able to see what happened and learn from your past mistakes. You can access your reports directly from
Can Debit Cards Help or Hurt Credit Scores?
Debit cards are widely used for day-to-day transactions such as withdrawals from ATMs and in-store purchases (and online purchases with some cards). But since you’re spending your own money with a debit card – which is usually linked to your chequing account – they do not generally impact credit scores.
Debit cards are not a form of credit, so using one does not contribute to credit history or affect your credit score (except in rare cases, like having an unpaid overdraft sent for collection, as described below).
Differences between debit cards and credit cards
A debit card is linked to your chequing account. This is the type of card you get when you sign up to a bank. You put your own money into your chequing account (or your employer may pay your wages directly into it), and you spend that money however you need to. When your balance gets low, you top it back up. It’s your money, so you’re not borrowing anything from the bank to use it.
A credit card, on the other hand, borrows money from a bank or other financial institution. When you use a credit card, you spend the bank’s money. As you spend, you need to repay the money you’ve borrowed, in order to replenish the credit you use. Every month or so, your credit card usage and repayments are reported to the credit bureaus, which contributes to your credit score.
When a debit card can impact your credit score
Since you mostly spend your own money with a debit card, your usage generally doesn’t affect your credit score. However, if you have an overdraft feature available on your debit card and you go into overdraft, you need to clear that up quickly. Going into overdraft itself won’t impact your credit score, as long as you repay the overdraft in a timely manner. If you fail to repay your overdraft, though, and the bank reports your failure to a collections agency to recoup those funds, that will be reported to the credit bureaus and it would hurt your credit score.
Debit Cards That Help Build Credit
Unfortunately, in Canada, there aren’t yet any debit cards that help you build credit. Although, these may be coming. In the United States, however, there are some newer fintec companies – for example, Extra and Fizz – that have begun to offer credit-building debit cards. These companies have a unique banking approach to make this work, offering you a debit card that’s linked to another chequing account in your name. You put money like normal into your regular chequing account and you spend from the credit-building debit card. You can’t spend more on one card than you have in the other account. Each day, your credit-building debit card is automatically paid off with your own money from your other chequing account. At the end of each month, all of your daily micro-loans that you’ve spent and repaid are tallied up and reported to the credit bureaus.
Other ways to help you build credit
So, while debit cards may not be able to help you, there are options in Canada that can help you build credit.
Secured credit card
Credit cards are one of the best ways to build credit. But not everyone will be approved for a regular credit card. Luckily, there are secured credit cards, which might be the best option if you have poor or limited credit history. Secured credit cards work like regular (unsecured) credit cards when it comes to spending, but they’re a little different in the set-up. To open a secured credit card you put down a cash deposit, which the bank holds as collateral against the money you then borrow with your secured credit card. Just like a regular credit card, you can spend and repay credit using these cards, and your spending behaviour is reported to the credit bureaus.
Another way to build credit is to become an authorized user on someone else’s credit card. If someone agrees to add you as an authorized user on their credit card, they trust you to be responsible. As an authorized user, you will also get a copy of their credit card and any spending you might do, and debt you accrue, ends up on their account. But even if you don’t ever spend a cent on their card, you’re building credit alongside them – because as long as they’re using their credit responsibly and building credit, you will be too.
Historically, you didn’t get credit – and didn’t build credit – for paying your rent, even though it’s a financial obligation that can prove you are responsible and reliable with your finances. In Canada, you do now have the option to have your rent reported to Equifax, one of the two consumer credit bureaus. Borrowell offers rent reporting through its Rent Advantage program for $8 a month, and the Landlord Credit Bureau offers something similar for $5 a month via FrontLobby. Reporting your on-time monthly rent payment every month can help you build your credit over time.
Credit building loans
Credit building loans are small loans you take out with a lender for the express purpose of paying it back and building credit. These loans generally don’t require a minimum credit score and are great for people looking to build credit for the first time or rebuild damaged credit.
How KOHO Helps Rebuild and Improve Credit
KOHO specializes in helping you build credit. With two ways of building credit, you’ve got options with KOHO. With KOHO credit building, you pay a small monthly subscription fee, which is used to pay down a line of credit that KOHO manages on your behalf. This lasts for six months and can be renewed. With KOHO flexible credit building, you designate an amount between $30-$500 and provide the amount as security for a line of credit. You spend your money as you like, ensuring you repay what you borrow at the end of each month. Regardless of which option you choose, KOHO reports your successful repayments each month, to help you grow your credit score.
For more information on KOHO, as well as plenty of advice on finances, saving, and building credit, be sure to check out KOHO’s searchable catalog of learning guides.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.