10-Nov-2017 written by : FSI-Team
Before we look at the impact of debit cards usage (if any) on the credit score, it is important to understand the difference between debit cards and credit cards. Debit cards are linked directly to the savings account of the customer; thus when a debit card is used the amount is directly debited from the account that it is linked to. There is no credit extended to the user and the amount that can be used is dependent on what the customer has in his/her account or the debit card usage limit.
Credit cards on the other hand come with a sanctioned credit limit; this is the upper limit that can be spent using the card without paying the old dues. When the credit card is used there is no debit from the customer's account and he/she gets a bill at the end of the cycle which they need to pay. Failing to pay on time attracts a penalty, interest charges and also a hit on the credit score.
So to answer the question "I use my debit card everywhere, what will be its impact on my Credit Score?
There is no direct impact on the credit score, due to debit card usage but there is some indirect impact on the credit score of the person.
The CIBIL Report of any individual contains details about the different types of credit which includes various loans and credit cards. The rating is based on the payment details about these loans, their tenure, inquiries about getting new credit, credit utilization ratio of credit cards and the credit mix. None of the factors that account for the final score include the debit card usage or any other details related to the debit card or the bank account it is linked to. For credit cards, users get a bill which they have to pay on time and this is taken into account when the score is calculated. How much of the credit card limit is used is also important for the score calculation. Since there is no credit extended on debit cards, the amount that can be used depends on what you have in the bank account and the daily limit, thus it is in no way going to have any direct impact on the scoring.
As we know credit scores are all about credit history which includes credit card usage. While loans are taken only when someone has a specific need like buying a house or a car or for education purpose or a financial exigency, credit cards are more of a convenience. Thus while loans are taken strictly on a need basis, no such rule applies to credit cards. Users do not have to pay any interest on credit card usage as long as they pay on time. Using credit cards offers a lot of ease and also gives you some financial lee way as you do not have to pay immediately. Thus credit cards can be a good way to create a credit trail, without bearing any extra cost and one can get a credit rating based on their usage. Credits cards can also help one improve CIBIL score. If somebody has no credit score or their score is low, using the credit card carefully over time while making timely payments can help them in getting a healthy score or improving it over time.
If someone uses their debit card at all times then they are missing out on an opportunity to get a credit score or better it. Using the credit card occasionally even if it is for small transactions can help one beat this problem.