Credit-Building Debit Cards: Are They Safe?

By Bethany Hickey

In the last few years, multiple fintechs and banks have released credit-building debit cards. While they’re not true debit cards, they might actually be a good option for someone looking to build credit without racking up debt — if you use them correctly.

How can a debit card build credit?

Regular debit cards aren’t a form of credit, so you don’t build credit history when you use them. When you use a debit card, it’s your own money.

However, credit-building debit cards are actually a line of credit, usually backed by an external bank account.

In most cases, your linked account balance is what sets the credit limit, and after you use the card, the outstanding balance is deducted from your linked account. Those payments are then reported to the credit bureaus to build a credit history. 

These debit-credit cards are usually offered by fintech companies, and a few big ones include Fizz, Current, Extra and Chime. Debit-credit cards are pretty new, so there’s only a handful, and some work a little differently. But I’m willing to bet their popularity will increase in the coming years, because they offer a safer alternative than actual credit cards.

Credit-building debit cards aren’t true debit cards

The name “credit-building debit card” is a bit misleading, because they’re not regular debit cards. And companies releasing these products are likely calling these products debit cards for seven reasons:

1. They’re linked to a checking account.
2. The checking balance determines the credit limit.
3. The outstanding balance is automatically repaid with your checking account.
4. Debit sounds safer than credit.
5. There’s no credit check.
6. There’s no APR or interest charges.
7. They often offer unique rewards and savings not found in regular credit cards.

Are these products safe?

Credit-building debit cards can be safe, if they’re used the right way. Debit-credit cards are likely to have low borrowing limits, which can help you avoid building massive debt that often happens with regular credit cards. And since most don’t charge any APR, balances won’t accrue interest, either.

Many fintechs offering these products offer additional features that help avoid overspending, such as freezing the card if you miss a payment. Automatic payment options are also standard to keep your balance low to avoid excessive debt.

They can be safer than regular credit cards

I’d wager they’re a little safer than traditional credit cards, simply because of the overall cost.

Regular credit cards can charge late fees around $30 per incident, annual fees and interest — things you won’t normally encounter with debit-credit cards. Credit card interest rates also aren’t limited by federal regulation. Average credit card interest rates were 20.68% in May, as reported by The Federal Reserve.

But, because debit-credit cards have a credit limit based on your checking balance, you probably won’t have a lot of borrowing power. Don’t expect these cards to come in and save the day when you have an unexpected expense crop up. While credit cards have APR and extra fees, they’re still better suited for emergencies or large purchases.

How to use debit-credit cards

Even though you won’t have to worry about APR or any other fees you’d normally find with a line of credit, if you're not careful, credit-building debit cards still pose a little risk. Missed and late payments can still be reported to the credit bureaus and harm your credit history.

If you get one of these products, I heavily recommend keeping autopay on. That way, any outstanding balance is repaid automatically. While these cards are technically credit lines, don’t treat them as “buy now, pay later” products.

Limit these cards for everyday purchases, like you would do for a regular debit card. And if you’re treating these cards like debit cards, then you should only spend what you actually have in your account instead of accumulating debt.

What’s the catch?

As much as I love a “gotcha” moment, there aren’t many downsides to these credit-building debit cards. It’s hard to say that a mostly-free product with credit-building opportunities is bad. These cards have extra guardrails that you won’t get with regular credit lines that could help younger borrowers build a credit history safely.

These cards typically aren’t designed for large purchases or emergencies. If that’s what you need and don’t need to worry about building credit history, then I’d consider looking at traditional secured credit cards instead.

While “credit-building” is usually in the name, it’s up to you to maintain a positive payment history to actually improve your credit score with these products.

About the author:

Bethany Hickey is a personal finance writer at Finder, specializing in banking, lending, insurance, and crypto. Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance and AOL. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt. Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others. Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Credit Cards