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
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
Yet unlike many credit cards, debit cards with rewards often carry an annual fee. For instance, JPMorgan Chase
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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Fool contributor Dan Caplinger is a credit card fanatic, but he pays his balance every month. He doesn't own shares of the companies mentioned in this article. Washington Mutual and JPMorgan Chase are Income Investor recommendations. Discover Financial is an Inside Value pick. The Fool's disclosure policy is always rewarding.