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Reap Rewards With Debit Cards

When it comes to convenience, some people swear by debit cards. And now, banks that have historically kept the purse strings tight on debit card rewards have started to loosen up a bit.

People seeking rewards for making purchases have usually done better using credit cards. Discover Financial's (NYSE: DFS  ) Discover Card was the first card to offer cash back on purchases, but other card issuers quickly followed suit. Now, you can get all kinds of rewards, from travel to gasoline to points redeemable for a variety of merchandise.

Debit cards, on the other hand, were slow to come around to the rewards arena. But a recent study from Bankrate.com shows that you can find some with rewards programs.

Still on the stingy side
For the most part, however, debit card rewards programs compare poorly to those of credit cards. While 1% cash back is pretty easy to find among credit cards, you won't find it on debit cards.

Citizens Bank, for instance, offers a reward program where you get one point for every dollar you charge. With 10,000 points, you can get rewards like a $25 deposit to your savings account. That translates to a 0.25% cash back program. Washington Mutual (NYSE: WM  ) will pay you $0.03 per debit transaction, regardless of its size, up to $250 per year. Fifth Third (Nasdaq: FITB  ) has a program that offers one point for every $3 you spend; you can use the points to buy gift cards with a value of about a penny per point, so this is equivalent to about a 0.33% reward.

Yet unlike many credit cards, debit cards with rewards often carry an annual fee. For instance, JPMorgan Chase (NYSE: JPM  ) charges between $25 and $65, depending on the rewards package you choose. Wells Fargo (NYSE: WFC  ) charges $12 for its rewards program.

Less to share
The primary reason debit card rewards are less generous is because banks make less money from debit card transactions. When Visa published its interchange fees about a year ago, you could see that while most merchants pay less than 1% on debit card transactions, similar charges for credit cards typically run from 1%-3%. Leaner margins on debit cards give banks less room to give good rewards.

As a result, if you're looking to maximize your rewards, stick with credit cards. With the other advantages credit cards offer, such as interest-free grace periods and the ability to dispute fraudulent transactions without money ever leaving your account, they're still a better bet for most people.

On the other hand, some find the imposed discipline of debit cards better for their finances. If you're one of them, you might as well get whatever rewards you can. They may not be as good as credit card rewards, but they're still better than nothing.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2010, at 6:44 PM, DebitRewards wrote:

    Excellent article but it's time for an update. There are debit cards out there now that are giving 1% back and I think banks are now recognizing that people are choosing debit vs. credit big time. Places like PerkStreet are even running promotions for 2% cash back for 6 months (reverts to 1% thereafter).

    We're gathering a complete list now over at http://www.debit-rewards.com because we are excited that people are being rewarded for spending smarter!

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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