Chasing credit cards: debit card rewards

Debit cards are fast becoming plastic of choice for many Americans. Trying to attract more customers, banks offer debit rewards programs, such as cash back or airline miles that work similar to credit card rewards. However, be careful: if you are expecting the same terms that you would get with your credit card, you are likely to be disappointed. While the debit rewards options are better than ever, there is plenty of room for improvement.

According to CardData, since 2004, purchases made on Visa and MasterCard credit cards have increased 40%. Purchases made on Visa and MasterCard debit cards have jumped 120%. Now when a debit card has become so widespread, you should get the most out of it, understand the benefits and avoid the pitfalls. 

Debit and credit cards have much in common: the same form, the same logos – Visa or MasterCard - and they both can be used for making purchases or withdrawing money. However, applying for a credit card means that you are taking a loan, which has to be paid back. There is a possibility to accumulate a heavy credit card debt.

When you get a debit card, you spend your own money. You can’t accumulate debts because zero balance means that no more purchases can be made. That’s why debit cards have become more popular in today’s difficult financial times – they are ideal for people who want to control their spending habits and stick to budget. 

One of the big allure of credit cards is beneficial rewards you receive for spending with it. But what if you want to use a debit card? Nowadays issuers try to adapt credit card loyalty feature to a debit card world. However, there's a big difference between the rewards programs of credit cards and debit cards. 

Debit card rewards are typically skimpier than their credit card counterparts. Generally, banks offer one point for every $2 spent with a debit card, compared with one point for every $1 spent with a credit card. For example, Citi Thank You Network rewards program lets you earn one point for every $2 in debit purchases and one point for every $3 in PIN transactions. With the Citibank AAdvantage Debit card you can earn one mile for every $2 spent, up to 60,000 miles per calendar year. 

Industry experts say that the actual value of credit rewards programs is about 40-60 cents for every $100, while the value received for a debit card program is about 10-20 cents. Rewards debit cards may come with an annual fee ranging from $10 to $50 a year for better benefits. On the contrary, most rewards credit cards do not charge a fee.

Credit card rewards programs often offer higher rewards for certain types of day-to-day purchases, for example airline tickets, gasoline or groceries. Debit reward rate usually stays the same for all types of purchases. It will take you more time to accumulate enough points for redemption. 

In addition, debit cardholders are usually required to make a signature transaction rather than entering their PIN to actually receive the rewards. In other words, you need to select "credit" instead of "debit" when using your debit card (money is still withdrawn from your checking account right away). The reason is simple: banks pick up a higher interchange fee for that type of transactions. This is why you receive a higher reward for signed transactions over PIN transactions.

Overall, debit card rewards are a great way to set a little money aside. But for people who are credit card savvy (and pay their balance off in full each month to avoid interest charges that often outweigh all benefits), a credit card reward program usually offers more incentive.

However, don’t apply for credit cards just because they come with juicy rewards programs. Take a realistic look at all terms and features. Are the rewards worth the possible costs? Do you really need them? Ask the questions, determine the best options for your needs and apply for a card that matches you most.