Debit Cards: Less Rewarding

With interest rates near zero, banks are using debit-card rewards programs to entice new customers and retain current ones. Twelve of 14 large banks followed by Corporate Insight, a financial-services research firm, offer at least one rewards program.

But debit-card rewards are less generous than the rewards credit cards offer. For one thing, just over half of the debit cards you can select with a rewards checking account charge an annual fee, which can be as high as $65. And the Corporate Insight survey found that it's common to earn only one mile for every $2 spent with your travel rewards debit card, instead of the usual one mile per $1 spent with a credit card. With many programs, you have to spend $25,000 to earn $50. (One standout is the U.S. Bank FlexPerks Travel Rewards Check Card, which offers a $50 rebate when you spend $5,000. See www.usbank.com.)

And you may not even get the rewards points if you enter a PIN instead of signing for purchases because entering a PIN generates lower merchant fees for banks. KeyBank uses a carrot and a stick to get you to avoid punching in the PIN: It offers two points for every $1 you spend when you sign, versus one point for every $6 you spend on PIN purchases.

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Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, debit cards may be more rewarding to consumers (see 6 Ways Financial Reform Will Change Your Personal Finances). The law permits retailers to offer discounts for cash or debit-card transactions, and retailers may set a minimum, up to $10, to use a credit card. The act also requires the Federal Reserve to issue regulations on the fees that merchants pay to issuing banks to ensure that those fees are "reasonable and proportional" to the banks' costs (small banks and credit unions are exempt). Merchants will be able to choose between at least two competing networks to process each transaction, which could drive down merchants' costs. Whether they pass the savings on to consumers remains to be seen.