5 options to morphing debit card rewards


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The path debit card rewards are taking

Cash back. Gift cards. Travel discounts. The perks of using your debit card had seemed endless. Now, your card’s ability to earn points for your everyday spending is shrinking fast.

As institutions around the country notify account holders that using their debit cards will no longer deliver any kind of payoff, account holders are struggling to cope with a new era of less rewarding money management.

If your debit card rewards program already has fallen victim to recent industry changes in rules governing banking, consider these five strategies for moving forward.

Befriend the little guy

Big banks may be slamming the door on their debit card rewards programs, but your check card can still pay you back at many community banks and credit unions.

Jane Lundquist, executive vice president at Rockland Trust in Rockland, Mass., describes Rockland Trust’s debit rewards program as a win-win situation for the bank and its customers. Account holders who receive paperless statements can earn up to $300 in cash back each year, and the checking account comes with no minimum balance requirements or monthly fees.

A credit union also may provide the solution for your rewards searching.

David Small, spokesman for the National Credit Union Administration in Washington, D.C., says some credit unions operate debit card rewards programs at a loss because of the demand from their members.

Because credit unions are not-for-profit institutions, consumers may find that these outlets will continue to offer debit rewards because they’re not as limited by their bottom line, Small says.

“Credit unions are willing to offer products that their members want (and) that do not serve as a revenue generator,” Small says.

Play the waiting game

Don’t make any sudden moves.

Financial institutions recognize your frustration with rising bank fees and shrinking rewards, and they still need your business. As the banking industry settles in to the new norm under recently enacted laws, you may want to hold out for a few months as banks determine how to attract your business.

In some cases, attracting your business may mean passing the buck — literally.

“We are seeing a shift toward merchant-funded programs,” says Greg McBride, CFA, Bankrate’s senior financial analyst.

Many of these programs give account holders cash back or points for spending with certain retailers. Outside of new programs, be sure to keep your eyes open for promotional incentives.

Lundquist says the bank sees the ability to continue offering a debit card rewards program as a window of opportunity to attract new customers. In fact, the bank recently launched a marketing initiative offering double cash rewards for debit transactions through the end of 2011.

Build your credit

Plastic can still pay you back, but this plastic comes with a bit of extra weight: interest rates.

McBride says credit card rewards programs can often be more than twice as rewarding as debit card rewards programs. While some debit programs pay as little as a quarter of a percent, McBride says that a 1 percent reward ratio for credit cards is easily attainable.

Bankrate’s 2011 Credit Card Rewards Survey shows some programs extend well above that 1 percent cash-back ratio. Some programs offer as much as 5 percent cash back in certain spending categories.

However, McBride warns that carrying any balance on a credit card will quickly negate any rewards points.

“The key with credit card rewards is that you must pay the balance in full every month,” McBride says.

Win the battle between fees and rewards

Many banks are altering their debit card rewards programs to implement monthly or annual fees in order to earn points. While a few bucks may not sound like much to keep racking up your prized rewards points, fees typically add up more quickly than points or cash back.

“The fees on a debit rewards program can be a very high hurdle to clear,” McBride says.

Consider McBride’s example of a consumer paying a $5 monthly debit card fee with a rewards payout of 0.5 percent. In this case, the first $1,000 of spending each month would go toward offsetting the $5 fee.

If an account holder is spending a large amount each month on a debit card, using a credit card instead may make more sense. The higher rewards ratio will prove to be more rewarding. There also may be more incentive to enroll in a credit card rewards program and to pay off any existing credit card debt, McBride says.

Look beyond your points

While rewards options and account incentives are appealing, it’s crucial for consumers to look at their banking needs from multiple angles.

For consumers who are considering switching banks in pursuit of another debit rewards program, McBride recommends weighing additional factors such as free checking, ATM convenience and the range of products and services that each bank offers.

As fees continue to pile up at some of the nation’s biggest banks, finding an account without any additional hurdles or costs may prove to be especially rewarding for your personal finances.

“You certainly have to look beyond the debit card rewards program,” McBride says. “You have to determine if your new institution and its account offerings are a fit for your lifestyle.”

Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.