I found a novel item at my bank recently- a new bank debit card was being offered which provided rewards and points. Like traditional reward based credit cards, this one functions similarly. Unlike my current debit card (which was free ) it had a fee attached to it. Still, rewards offered are a good thing right? On the surface it seemed viable.
As I stood in line discussing the bank reward debit card with a teller, I had an interested line of listeners behind me, all equally curious I suspect. This poses a question: Should consumers switch to reward debit cards and nix credit cards all together? The short answer upon some careful research and prodding of the banks offering these is, “No. Stick with your rewards credit cards, they offer a better deal and greater protection.” (Provided, of course, you have no problem paying on time and keep the balance below a third of the limit).
Here’s why.
- Fees charge range from $0 (Sun Trust, Regions Bank, Citi Bank) to $55 (US Checking)- but the vast majority average around $25 (some of whom are Chase, Charter One, Citizens Bank). Some are one time fees, but others are annual fees.
- Debit rewards are skimpy compared to credit card companies. Typical rewards offered are about $4 cash paid for $400-$500.00 (about 1 percent average).
- Even redemption point programs are skinnier than similar credit card programs. Some like Citi Bank reward points take a seeming forever to rack up even small items. Take Oprah’s pick of chocolate stores- John and Kira’s. Offered by Citi in their Thank You Rewards Program, the fetchingly delicious 15 piece handcrafted John and Kira’s assortment (in trademark wooden box) is a “mere” 4800 points (on sale from 4900 pts). I don’t even want to calculate how long it would take to earn almost 5K in points to pick up an item valued at $33. Granted, some debit reward programs offer deals on travel, entertainment, etc that are better than catalog redemption programs or cash back, but they are still a far cry from reward credit cards.
- No fraud protection. Identity theft is an increasingly rampant crime. Credit card companies are vigilant to this, and offer protection on fraudulent purchases. Usually consumer liability is limited to under $100.00. Not so with debit rewards. If a thief steals your identity via debit transactions, your money is usually gone.
- Overdrafts are a hazard. We’ve all done it- overestimated our checking and underestimated our transactions. In the event your account is over drafted, fees are excessive.
- No option for building credit. Perhaps the greatest reason lies in this. Debit card programs do not report to credit bureaus. Prompt payment and keeping balance below a third of available limit on traditional cards is one of the best ways to increase your FICO- a perk even the best debit reward doesn’t offer. Even if your credit won’t allow for a traditional rewards credit card, a secure card that reports to all three bureaus is still your best option. Build your credit and gain a card that does offer excellent rewards, credit protection, and more bang for your point bucks in lieu of debit reward cards.
For an excellent comparison of these programs, see this link.