Why credit bureaus will never care about your debit card history

Yahoo Finance
TV personality Suze Orman speaks at the Women's Conference Tuesday, Oct. 26, 2010, in Long Beach, Calif. (AP Photo/Matt Sayles)
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TV personality Suze Orman speaks at the Women's Conference Tuesday, Oct. 26, 2010, in Long Beach, Calif.

When it comes to your credit score, there are five basic factors that matter: credit payment history; credit balances; ages of credit accounts; new credit inquiries; and types of credit accounts.

Notice a trend here? Credit. Credit. Credit.

Nowhere in your credit score does it reflect whether you’ve kept a healthy checking account balance, nor how many prepaid debit cards you own, how often you overdraw your account or the last time you contributed to savings. 

If personal-finance personality Suze Orman has her way, that could all change. Orman launched a Change.org petition in January asking Congress (specifically Sen. Elizabeth Warren, who is a longtime consumer finance advocate)  to make banks turn over non-credit banking history to credit bureaus.  
“Debit card users are at a serious disadvantage to building financial security because of senseless policy,” says Orman, who did not respond to a request to comment. “You could be the most loan-worthy person in the world, but simply because you chose to use a debit card rather than a credit card, you run a high risk that your credit score will be negatively impacted.”

She makes a compelling argument and her petition has so far attracted support from more than 175,000 people. Even we have to admit it all sounds great … on paper, anyway.

But do we really want to live in a world where our debit transactions are just as likely to wreck our credit as our credit cards? Here are a few reasons why this will never happen:

Creditors will never look at credit and debit use the same way

Credit scores exist to help lenders decide who’s most likely to be a trustworthy customer, and as of yet, there’s no proof out there that debit transactions indicate creditworthiness in consumers. For starters, you’re not using the bank’s money when you swipe your check card. It’s your money. Who are they to judge whether you’re spending it the right way or not?

“Just because it's being used in a plastic format and looks like a credit card, some people think it belongs on a credit report, which makes no sense,”  says John Ulzheimer, President of Consumer Education at CreditSesame.com. “Debit cards and prepaid debit cards are not credit obligations and are not liabilities. That's why they are not, and have never been, reported to the credit reporting agencies.”

You have to take the good with the bad 

Hypothetically speaking, if consumers were given better credit scores based on their debit card use, it goes without saying they could be docked points just as easily.

“It’s a slippery slope if you start putting debit history on credit reports,” says Ken Lin, CEO of CreditKarma.com. “There’s no magical solution where everyone’s credit scores get better. You have to count the positives with the negatives. That’s how our credit system works.”

It’s bad enough consumers shell out more than $200 a year for overdraft penalties. Imagine taking a hit to your credit score every time you accidentally cashed a check too soon or miscounted your bank account balance, as 28% of consumers did in 2013.

It’s well understood you can lose credit score points by closing credit accounts. It’s safe to assume consumers would also be penalized for closing or switching bank accounts, which 12% of consumers did in 2013. Banks themselves closed 30 million checking accounts between 2000 and 2005, according to a 2008 Harvard Business School report.

And what about the 10 million American households that don’t even have a checking account? Would their credit scores suffer the same as people who own too few credit cards?

Eventually, consumers will start to pay for it

As it stands, the credit reporting system is 100% voluntary, Ulzheimer points out. That means companies can decide whether or not to report customer credit activity on their own. If banks and prepaid debit card companies were suddenly obligated to report checking transactions to credit bureaus, eventually that extra cost would trickle down to consumers. 

“Forcing companies to report to the credit bureaus, notwithstanding the inappropriateness of debit cards being on credit reports, exposes them to Fair Credit Reporting Act obligations, which are very expensive with which to comply,” Ulzheimer says. “That means higher costs for all consumers.”

It won’t make prepaid debit cards any better for consumers

Prepaid debit cards are something of a controversial financial tool, given they often are laden with monthly charges and fees. Orman herself is one of many celebrities to lend their faces to such cards, marketing them as a useful budgeting tool for consumers weary of high-interest credit cards, or kids too young to own a checking account of their own.

But more often than not, they can wind up costing consumers even more than a regular checking or credit account.  Some, such as the Pink Diamond RushCard, charge up to $10 a month just for the luxury of holding the card, while most charge at least a couple of bucks for ATM withdrawals and reloading fees — both of which you can do for free with a regular bank account.

“Even the most un-free checking account is probably cheaper than your average prepaid card,” writes Nerdwallet’s Anisha Sekar. “Any budgeting help or self-discipline you get from a prepaid debit card will be wiped out, and then some, by fees. It’s generally more expensive than a credit card, but without the ability to borrow.”

Even if prepaid debit card issuers were to start reporting transaction history to credit bureaus, there are still few justifiable reasons to own one.

Says Ulzheimer: “Pretending like the world would be a better place just because prepaid debit cards could be reported to the credit bureaus ignores their larger downside, which is that they're horrible products heavily marketed to young people and minorities."

The bottom line:

While we agree credit reporting agencies have a long way to go in the realm of consumer-friendliness, we think their resources could be much better spent elsewhere (for starters, figuring out how 42 million errors wound up on credit reports last year).

Even if lawmakers back a plan to include debit transactions in credit reporting, credit reporting agencies  aren't going to simply roll over and play ball until debit history can be proven to indicate credit worthiness. That, after all, is what a credit score is supposed to indicate in the first place.

In the meantime, there are many proven ways you can improve your score without having to picket on Capitol Hill. Start by making on-time payments, tackling high-interest credit card debt above all others, and keeping your card balances under 10%.

Prefer to ditch credit altogether? It's possible to limit your credit use and still build up your score. Your on-time student loan and mortgage payments both count toward your credit score. You can also research alternative ways to boost your credit, such as taking out a secured credit card or a credit-builder loan through your local bank or credit union, or by keeping track of on-time rent payments.

In response to a request for comment, a spokesperson for Sen. Warren issued this statement to Yahoo Finance:

“Senator Warren believes it’s important for families to have various ways to build their credit and enhance their access to affordable financial products and services.”

Will debit card reporting be one of those ways someday? Time will tell.

But we wouldn't bank on it.

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