Almost 1 out of every 4 Americans believes using a debit card affects their credit score, a new survey by financial website NerdWallet has found. That’s a dangerous misconception that could make it harder to develop a strong credit score and eventually make big financial steps, such as buying a house.
NerdWallet surveyed more than 2,000 U.S. adults about how they typically paid for purchases, their feelings about credit cards versus debit cards, and their history with credit card debt. The results offer a revealing peek into how Americans think about the plastic in their wallets. In addition to a significant minority who were confused about the relationship between debit cards and credit scores, many people also said they preferred debit over credit and felt more financially responsible when they steered clear of credit cards.
Here’s what we learned about how Americans really think about credit and debit cards from the NerdWallet survey.
Many think debit card spending affects credit scores
Roughly one-quarter of people surveyed were under the mistaken impression that debit card spending affects their credit score. People who primarily used credit cards were slightly more likely to hold this belief — 28% versus 21% — as were people over age 55.
Credit scores are a way for banks to decide how risky it would be to lend you money. Because you’re spending your own money when you use a debit card, it doesn’t tell lenders anything about your ability to pay back a loan. But debit card use could affect your credit score in an indirect way, if paying with debit keeps you from overspending on credit cards and running up debt you can’t pay back.
Next: Americans aren’t as addicted to credit as you think.
Many Americans are choosing debit over credit
Americans have a lot of credit card debt — more than $1 trillion — but, somewhat surprisingly, people NerdWallet surveyed said they were more likely to pay with debit than credit for their everyday purchases. Forty-four percent of respondents used their debit cards for groceries, gas, and entertainment, compared to 34% who preferred to use credit.
People who prefer debit are pretty loyal to their bank cards. Eighty-one percent said a debit card is the best way to get cash. More than three-quarters said debit cards are best for buying groceries, while more than 60% said they’re the best payment option for eating out or filling up the tank.
Next: Why people are scared of credit
Fear of debt encourages debit use
There’s a good reason why many people prefer debit cards. Nearly three-quarters of debit users told NerdWallet they’d previously been in credit card debt. In contrast, just 44% of credit card users said they’d run up debt on their cards. People who struggle to use credit responsibly could have willingly put their cards on ice in an attempt to control their spending, or it’s possible their past debt problems mean they no longer have access to credit.
Next: Want to feel financially responsible? Pay with debit.
Debit cards make us feel good about managing money
More than half of loyal debit card users said paying for things with money they already had in their bank accounts made them feel responsible. Only 40% of credit card users felt the same way. Instead, they were more likely to feel secure when using their cards, which makes sense, as credit cards have more financial protections for consumers than debit cards.
Twenty-nine percent of credit users also confessed to feeling “impulsive” when using their cards. Considering how easy it is to splurge on stuff you can’t really afford when you have a credit card burning a hole in your wallet, that’s no surprise. (If you struggle with buying more than you should, make sure you know about the sneaky tricks stores use to get you to spend more money.)
Next: Credit cards also make us anxious.
Credit cards make people anxious and unhappy
Not only did using credit cards seem to encourage impulsive spending, but 24% of credit users said they felt anxious or overwhelmed when they handed their cards over to a cashier, NerdWallet found. Twenty-one percent said they felt unhappy using credit cards. (Only 11% of debit users felt the same.) And back in 2007, 28% people surveyed by Bankrate said using credit cards made them feel guilty. These guilty, anxious credit card users might have struggled with debt in the past or fear they won’t be able to control their spending.
“Many Americans feel anxious or overwhelmed when they use credit cards because they associate them with out-of-control debt. And for people who struggle with debt and overspending, credit cards can be a problem,” Kimberly Palmer, NerdWallet credit card and banking expert, said in the report.
Next: Relying on debit cards has some hidden costs.
Debit cards have hidden costs
Debit cards can keep your spending under control and help you stay out of debt. But you typically won’t earn reward points when you pay with a debit card, and consumer protections are more limited. You could be liable for fraudulent charges if your card is stolen and you don’t report it, disputing transactions and getting your money back can be challenge, and you probably won’t get extra warranty protections and insurance.
“Credit cards come with fraud protection as well as many other benefits, which means for most purchases, using a credit card is generally the best option for consumers,” Palmer said. “Using cash to make a big purchase is like pulling a cookie sheet out of a hot oven without oven mitts — you’re leaving yourself completely unprotected.” Many consumers aren’t clued in to the fraud protections that come with credit cards. Only 15% of people Experian surveyed said the extra peace of mind was the biggest benefit of having a credit card.
Next: Debit cards and your credit score
Taking control of your credit score without taking on debt
Using a debit card has one more big drawback: Debit cards have zero impact on your credit score. Does that mean you need to resign yourself to racking up debt if you want a 700+ score? No.
For one, credit cards aren’t the only information on your credit report. Student loans, mortgages, and auto loans are also factored in to your score. Plus, you don’t need to be carrying big balances on your cards to boost your score. In fact, that’s a bad idea. Simply having a card, making a few purchases, and paying the balance promptly will help improve your credit score.
Next: Credit versus debit: Which is better?
Should you choose credit or debit?
Still confused about whether you should pay with a credit card or debit card? The right answer might come down to how good you are at managing money. People who don’t have a problem paying their bills on time and can resist the temptation to overspend are good candidates for credit cards, which “are the better option for most purchases, because they often come with benefits such as purchase protection and rewards points. They can also help you build your credit score,” Palmer said.
However, if having a card in your wallet encourages you to splurge or you know you won’t be able to pay off your balance right away, choosing debit cards is a smart move. “If you are accruing balances on credit cards and paying interest and fees, credit cards quickly become expensive,” Palmer said. “If you will pay more to use a credit card due to an added fee, then using a debit card often makes more sense.”