How to make your credit card act like a debit card

Young adults these days are wary of credit cards. Yet building credit is important to qualify for loans for major purchases like a car or home. A fledgling digital tool intends to solve that problem, by helping credit cards mimic debit cards.

Debitize, an online tool that will be available as a mobile app later this summer, works to convert a credit card into a sort of debit card with benefits. The idea is that users can build credit and get the perks that come with many credit cards, while protecting themselves from getting mired in debt. (Debx, another startup, takes a similar approach, using a mobile app.)

Here’s how Debitize works: First, customers need both a checking account and a credit card. Then, they register online for Debitize and link both the bank account and the card to the tool. (As with many digital financial tools, users must share personal and account information with the service; Debitize says it uses bank-level security and doesn’t store account log-in credentials on its servers).

Debitize then tracks credit card spending and pulls cash from your checking account when you make purchases using the credit card. The money is held in a separate Debitize account (an FDIC-insured account at a bank that works with Debitize), and the tool pays the credit card bill automatically when it’s due.

The basic service is free; Debitize may earn referral fees in the future, such as when users open recommended credit cards. The company also may earn interest from funds accumulated in the reserve accounts, said Liran Amrany, the chief executive and cofounder of Debitize.

Card balances are paid monthly, or, for a $3 monthly fee, they can be paid weekly, which helps to keep card “utilization” — an important factor in calculating credit scores — low. (A representative of the FICO credit score model didn’t respond to a request for comment).

Why would someone want to do that, rather than simply use a debit card in the first place? Debit cards, which offer pay-as-you-go spending, are especially appealing to Millennials who may be burdened by student loans and wary of taking on more debt. People younger than 35 are the age group least likely to have a credit card. And some people, regardless of age, may simply be averse to the risk of running up unmanageable debt.

But there are good reasons to use a credit card instead of a debit card, especially when the balance is paid in full each month, Amrany said. Spending on credit cards is reported to the major credit bureaus, helping consumers to build a credit file and a credit score that can enable them to borrow larger amounts in the future.

Plus, credit cards often offer reward points or cash back for spending. Credit cards offer strong protections in case of fraud or a dispute with a merchant, and many offer automatic extended warranties for items purchased with the card. And renting a car is difficult without one.

“To me, there’s no reason to use a debit card,” said Amrany, who formerly marketed derivatives products at JP Morgan. So when two of his friends told him that they were abandoning their credit cards in favor of debit cards, the need for a tool like Debitize was clear, he said. “Why not pay for credit card purchases, every day?”

Christopher Abbott, 33, who works in telecommunication sales in Los Angeles, said he started out with one credit card linked to Debitize late last year and recently added a second. “I make all my purchases now using my credit card, so I can get my travel points,” he said. He doesn’t worry about overspending or paying interest on his credit card, since the money is withdrawn as he goes, he said: “It’s sort of like an escrow account.” Last year, the nonprofit Center for Financial Services Innovation recognized Debitize as a promising startup. “It’s helping people to responsibly manage credit card debt,” said Ryan Falvey, the center’s managing director.

Here are some questions and answers about credit cards and Debitize: Q: Does Debitize work with any credit card? A: The tool, which connects with customers’ accounts using software from Plaid Technologies, supports most major credit cards. Exceptions include Barclaycard and some Synchrony Bank retail cards, but Amrany said he hoped to add those soon. Q: Can Debitize overdraw my checking account? A: Debitize lets users set a minimum balance in their checking account; if a withdrawal would make the account fall below that balance, it won’t transfer the money. That could mean, of course, that the balance on the credit card may accrue interest, if enough funds aren’t set aside to pay the bill in full. Q: Can’t I just pay card purchases on my own, as I make them? A: Yes. You could go online after buying something and pay off the purchase directly from your bank account. But that can be a hassle to keep up with, Amrany said, especially if you are an active credit card user.