May 18 2011|08.00 AM UTC

Stan Reybern

Debit vs Credit Rewards: Which Do You Prefer?

Category: Credit, SRTags: , , , , ,


Almost everyone loves rewards programs. After all, who doesn’t want to be rewarded for buying things that they presumably would have bought anyway? Though there are many types of rewards programs out there, the two most commonly used are the ones associated with debit cards and credit cards.

Most consumers are familiar with the types of rewards offered by credit cards but debit card rewards tend to be overlooked. One reason for this is because, in general, debit reward programs are less enticing than credit reward programs. In fact, Consumer Reports found that credit cards bring in $0.65 in reward value per $100 of spending while debit cards only bring in $0.10.

One reason for this discrepancy is because banks don’t earn as much in interchange fees from debit card transactions as they do from credit card transactions, so they don’t reward these purchases as much. As we’ve seen with the Durbin Amendment, which caps debit card interchange fees, some banks have opted to eliminate these rewards altogether since they will now earn even less.

However, for those in the market for a reward card, you should look at all of the pros and cons of both types of cards before making a decision. Here is the breakdown of the differences between debit and credit reward cards:

Points Rewards

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Credit
As far as points go, credit reward programs generally earn cardholders one to five points per dollar spent. For example, the Citi Forward card earns five points per dollar spent on qualifying purchases and one point for every dollar for all others.

Debit
One the other hand, debit reward programs only earn around one point for every $2 to $3 spent. For example, debit cards linked to the Citi ThankYou Network can earn either one point for every $2 on signature-based purchases or one point for every $3 spent on PIN purchases.

Cash Back Rewards

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Credit
If you’re in the market for a cash back credit card, generally you should not settle for less than 1% cash back. One of the best cards for cash back is the American Express TrueEarnings card. This card earns 2-3% on qualifying purchases including gas and restaurants and 1% on everything else. The cash back reward feature also makes it easy to redeem rewards as the card simply sends you a check at the end of the year.

Debit
However, if you’re in the market for a debit card, 1% cash back is not something you should expect. On average, debit cards offer a lower rate for cash back and it can be restricted to specific types of purchases. One percent is not something you should expect from a debit card. Generally debit reward programs offer a lower rate for cash back or restrict cash back to only certain categories of purchases. There are always exceptions though. One of the best debit reward programs out there is the PerkStreet debit card. This card offers unlimited 2% cash back and 5% cash back on certain purchases! These rewards are enough to put most credit cards to shame.

Requirements

Debit
Since a debit card is directly tied to your bank account, you will need to sign up for a checking account with your desired bank to get your debit card. Before signing up, be sure to do some research about the account and make sure the requirements work for you. Often premium accounts offer better rewards, but make sure you are actually going to meet the requirements to benefit from these premium accounts.

Many banks have also started charging monthly maintenance fees that can negate any rewards earned if you don’t meet the qualifications to get them waived. A few too many overdraft charges will most likely cost you more than the rewards as well if you don’t pay close attention to your account balance.

Finally, be sure to read the fine print. For example, the Citibank/AAdvantage debit card mentioned above will only earn you miles if you select “credit” when making purchases.

Credit
With credit cards, you won’t need to sign up for a checking account but you will need to apply for the card. Keep in mind that the best rewards cards require you to have good or excellent credit to be approved for the card so make sure your credit score is up to par.

Also, some of the best reward cards have annual fees attached to them. For some people, their spending habits make it worth the extra fee because they earn so much from rewards. However, this is not the case for everyone. Take a look at your current spending and see how much you will earn from rewards versus the annual cost to see if these cards are worth it for you.

Finally, applying for credit cards actually hurts your credit score. While that shouldn’t dissuade you entirely if you are actually in the market for a new card, make sure that you don’t apply for too many at one time or else you may have trouble getting approved in the future. Also, if you are thinking about getting a loan or applying for a job in the near future, you might want to hold off on the new credit card until afterwards.

Effects on Credit

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Credit
One of the main differences between these types of cards is that a credit card allows you to establish credit. If you use your card responsibly by paying your bills on time and not using too much of your available credit line, your credit score will increase. A great or excellent credit score can save you thousands on interest rates in the future because you will get offered better loan terms for mortgages or cars. It can also help you get approved for apartments if you are looking to rent.

As mentioned above, opening a credit card will hurt your credit score at first. In the long term though, having more available credit will actually help your credit score because you will be using a smaller percentage of your credit each month (assuming your monthly balance stays about the same).

Just as a credit card can help your credit score, it can also destroy it. Late payments and maxing out your credit card are surefire ways to tank your score. If you are already struggling to make monthly payments, a credit reward card is not for you since they usually come with higher interest rates. Any rewards you earn would be negated by the amount you’d pay in interest.

Debit
A debit card does not affect your credit score at all. You can open and close these accounts as you please and there is no bill to pay at the end of month – a good thing for those who are struggling to manage their credit card bills. Your debit card is linked to your bank account so the only money that you can spend is what you have in your account. Many people who are trying to stick to a firm budget prefer debit cards for this reason, because it is easier to manage spending when you know exactly how much you have to spend and it immediately disappears from your account when it’s used.

One tip for those who choose debit cards, opt-out of your banks Overdraft Protection. By opting-in, you are actually allowing your bank to charge you an overdraft fee if you try and spend more than you have in your account. Your transaction will go through but so will a $30 or more fee. By opting-out, your purchase will simply be declined and you won’t have any unexpected fees the next time you look at your account.

Conclusion

Generally most consumers opt for a credit reward program, which clearly offers some better benefits when compared to debit rewards. With the Durbin Amendment, debit rewards will be changing; most likely making credit rewards seem like an even better option. However, it’s important to remember that credit rewards are only beneficial if you pay off your balance each month. These rewards cards carry higher interest rates than other credit cards and it can be easy to fall into debt if you’re not careful with your spending.

Which do you prefer when it comes to rewards?

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