Free money for debit card users

Want to get paid for spending your money? Find a bank that offers a debit card rewards program.

Bankrate.com surveyed the top 10 banks and thrifts in the top 10 markets in the country plus the top 10 credit unions to find out what debit card rewards programs are available and how they work.

See survey results:
Find the results for Bankrate’s 2010 Debit Card Rewards survey.

It’s not the final word on what’s out there, but it is a sampling of what’s offered by larger banks and credit unions around the country.

The survey found 40 different debit card rewards programs ranging from nationally available to local and regional offerings.

Of all available debit card rewards programs, 65 percent give rewards on signature purchases only.

Plus, more than half of the programs in the survey have no fee and 75 percent of them put no cap on the amount of rewards a card holder can earn.

Purchase limitations

Though not as rewarding as reward credit cards, there are decent perks out there for debit card users. The main hurdle debit card users must clear in order to qualify for rewards is at the point of sale.

Sixty-five percent of programs in the survey require a signature-based transaction for rewards.

Banks prefer signature-based debit card transactions because they receive a higher interchange fee from merchants for those sorts of payments versus using your PIN.

Thirty percent of the programs surveyed have no restrictions on purchases, but the majority of those, seven out of 12, pay less in reward points for PIN transactions.

Finally, 5 percent of the programs offer rewards only for purchases made at specific retailers, for instance, at merchant-funded malls such as the MasterCard MarketPlace.

They may actually offer the most benefit to consumers, according to John Hansen, director in the national financial services consulting practice at Hitachi Consulting.

“Whereas a debit card user might get a point for every $2 or $4 in a signature debit transaction, some of these merchant-funded mall transactions can rebate five (percent), 10 (percent), 15 (percent) or 20 percent on the merchandise,” he says.

The benefits may be outweighed by fees however.

A word on fees

Though fee programs tend to pay slightly more in rewards than fee-free programs, fees should be avoided at all costs for most people. At best, the debit card rewards program turns out to be a wash after paying a fee.

“The most common fee is $25 a year. At a typical reward ratio, you’d have to spend $5,000 just to earn back the fee,” says Greg McBride, Bankrate.com senior financial analyst.

Fees in the survey ranged from $12 to $55.

Bottom line: Avoid debit cards with fees attached.

Payout ratios

Of the 40 cards that offer bonuses for signature-only transactions, the reward ratios range from 0.2 percent to 3 percent of the purchase with the most common falling around 0.5 percent.

Among the 12 cards that pay out for PIN transactions, the rewards range from 0.1 percent to 0.5 percent with the most common around 0.5 percent.

But that’s not all, two cards had flat payouts for purchases above a minimum amount and four cards offered higher payouts for certain categories of purchases. For instance, the Bank of America US Airways reward card offers double miles for US Airways purchases.

Obviously, there is a wide range of rewards programs out there for debit card users.

“The whole debit card rewards market is vast and there are all sorts of variations and combinations with different reward levels and different behaviors that are rewarded,” says Hansen.

When evaluating debit card rewards programs, avoid fee-laden programs and remember, “it’s really signature-based transactions that pay off in terms of padding your reward,” McBride says.

Types of rewards

As far as choosing a debit rewards card, if you have the option you should go with one that matches your spending patterns and lifestyle.

“It really depends on how much you spend and where you spend it. A few cards offered higher payouts in certain categories of purchases; so depending if you spend a lot on travel or everyday purchases — groceries, gas or fast food — you can earn bigger payouts on certain cards,” McBride says.

Rewards run the gamut from cash back on purchases to airline miles and relationship-building programs.

Relationship-building programs focus on improving the banking experience for customers so they remain loyal and bring in more business.

These are programs “that are focused on the broader relationship with the institution, like Citibank’s ‘ThankYou’ program or Bank of America’s ‘Keep the Change,'” says Hansen.

Bank of America’s “Keep the Change” program “is not a debit card rewards program per se,” says Hansen and, that’s also why it wasn’t included in the survey. But it’s a useful program; Bank of America rounds up the cost of your purchases and deposits the difference between the actual cost and the next dollar into your bank account.

Another rewards program that consumers should be aware of is offered by PerkStreet Financial. It’s not a bank, but it offers checking accounts and debit cards through Bancorp Bank. The debit card rewards program offers 2 percent cash back to card holders with balances of at least $5,000. For customers with less than $5,000, the card pays 1 percent cash back.

They also offer up to 5 percent cash back at selected retailers every month.

“I’d say for the average American and how they spend, we offer 50 times the average. Even the better programs in the market you’re going to have a hard time getting more than 0.5 percent across everything that you spend,” says Dan O’Malley, CEO at PerkStreet Financial.

Expiration

The one caveat to the debit card rewards programs is that many rewards come with a ticking clock. Forty-five percent of the programs surveyed have no expiration, while 7.5 percent of rewards expire in two years, 32.5 percent expire in three years and 10 percent will last for five years.

In order to reap the benefits of a debit card rewards program, use up your points before they disappear. That’s a pretty easy to rule to follow when you’re getting something for nearly nothing.

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