Am I still building a credit score if I use my credit card like a debit card?

Question

I have a credit card through my local credit union. I am not sure if this is normal: Essentially, I am using my credit card like a debit card. If I anticipate any major purchases I will put money on the card prior to charging it. I try to keep a couple hundred dollars negative balance at all times. I have never charged amounts to my card where I have a balance due at the end of my billing cycle, so I have never paid any interest/always have the card paid in full.

I did not want to get a credit card but realized I needed to build my credit score somehow, so I got this one. I am used to paying everything in cash (which I still do for the most part). I found this method easiest for me because I do not need to keep track of my purchases or when payment is due.

1. Am I building a credit score using my credit card this way?
2. Is this helping/hindering my goal of establishing credit?

Edit: I mistakenly misused positive balance for negative balance. It appears I am using 0% utilization of my available credit.

Edit 3/2017: Coming back here to update for any future readers.

My original question was asked because of my reluctance to use a credit card, and ignorance of what 'good credit card usage' habit really is. I was confused to when you have to pay your balance, how much you have to pay, and what the interest rules were. I basically did not understand any of this and made a plan to pay the card in full before using it.

In hindsight, I agree with the sentiment from the responses below: this was wasted effort. I went the long way around using a credit card because I did not know how everything worked! Wasted effort borne from ignorance.

If you are using a credit card as a debit card, and are wondering what are the effects on your credit score, you are doing the following:

1. Payment On Time - GOOD
2. Credit Card Utilization 0% - BAD
3. Credit History - GOOD

I have an approximate credit score of right under 770. I spent 4 years with 1 credit card and no other form of debt. I have paid in full every month and have paid $0.00 in interest for the history of my account. At this phase in my life, I now have multiple lines of credit (student, auto) and am considering getting a second credit card to diversify my credit history.

Answer 1

I strongly suggest you look at CreditKarma and see how each aspect of what you are doing impacts your score. Here's my take -

1. Active account - Good
2. Zero Balance/Utilization - Actually bad
3. Building length of credit history - Good
4. On time payment history - Good
5. Credit score requests - Good (as you appear to not be applying for more accounts. The credit requests falls off after 2 years)

There's an anti-credit approach that many have which, to me, is over the top. "Zero cards, zero credit" feels to me like one step shy of "off the grid." It's so far to the right that it actually is more of an effort than just playing the game a bit. You are depositing to the card frequently to do what you are doing. That takes time and effort. Why not just pay the bill in full each month, and just track purchases so you move the cash to the account in advance, whether that's physical or on paper? In your case, it's the same as charging one item every few months to keep the card active. If that's what you'd like to do, that's fine. I'd just avoid having the card take up too much of your time and thought.

(Disclaimer - I've used and written about Credit Karma. I have no business relationship with them, my articles are to help readers, and not paid placement.)

mhoran's response is in line with my thinking. His advice to use the card to build your score is what the zero-credit folk criticize as "a great debt score." Nonsense. If you use debt wisely, you'll never pay interest (except for a mortgage, perhaps) and you may gain rewards with no cost to you.

Answer 2

Regardless of how it exactly impacts the credit score, the question is does it help improve your credit situation? If the score does go up, but it goes up slowly that was a lot of effort to retard credit score growth.

Learning to use a credit card wisely will help you become more financially mature. Start to use the card for a class of purchases: groceries, gas, restaurants. Pick one that won't overwhelm your finances if you lose track of the exact amount you have been charging. You can also use it to pay some utilities or other monthly expenses automatically.

As you use the card more often, and you don't overuse it, the credit card company will generally raise your credit limit. This will then help you because that will drop your utilization ratio. Just repeat the process by adding another class of charges to you credit card usage.

This expanded use of credit will in the long run help your score.

The online systems allow you to see every day what your balance is, thus minimizing surprises.

Answer 3

I always hesitate to provide an answer to "how does this affect my credit score?" questions, because the credit agencies do not publish their formulas and the formulas do change over time. And many others have done more reverse engineering than I to figure out what factors do affect the scores.

To some extent, there is no way to know other than to get your credit score and track it over time. (The credit report will tell you what the largest negative factors are.)

However, let me make my prediction. You have credit, you aren't using a large percentage of it, and don't have defaults/late payments. So, yes, I think it would help your credit score and would build a history of credit.

Since this is so unusual, this is just an educated guess.

Answer 4

AIUI credit cards report three main things.

1. Utilisation, how much of your available credit you are using. Best is low but nonzero. Zero is ok but not the best. However utilisation only has a short term impact on your score, "utilisation history" is not a thing.
2. Age of accounts, the longer you have had your accounts the better.
3. Whether or not you are paying your bills. Payment history has a longer term impact. Paying your bills correctly is good, failing to do so is bad.

The potential problem with your strategy is that by pre loading you never actually get a bill and so your provider may not report your payments.

Better to wait until the bill comes and then pay it in full. That ensures that your use of the card is properly reported.