Debit card rewards not so rewarding

Highway sign with the words Rewards-Next Exit

A growing number of banks are pushing debit card reward programs to attract new checking account customers or to get existing customers to use their debit cards more often.

Half of the nation's top 100 banks offered such programs at the end of 2009, according to research firm Aite Group. That's triple the number from three years earlier.

"Earn Rewards With Every Purchase!" we're told.

But debit card reward programs are rarely as generous as the banks make them out to be.

You must spend thousands of dollars to earn even small rewards. Some transactions aren't even eligible for points or rebates, and many programs charge annual fees that exceed any benefits you could hope to earn.

Here are five smart questions to ask before signing-up for any debit card reward program:

Question 1. How much do I have to spend to earn a reward?

Most debit card reward programs allow account holders to earn points they can redeem for gift cards from stores and restaurants.

But the number of points you need to earn a gift card, or the number of points you receive for each dollar you spend, can vary a lot from program to program.

The Wells Fargo Check Card, for example, requires you to spend $4 to earn a single point.

That means cardholders must spend $40,000 -- or more than many people make in a year -- to accumulate the 10,000 points needed for a $100 gift card.

You're getting back a paltry 0.25% of what you spend.

TD Bank's Visa Extras might sound like a better deal because it allows you to earn one point for every $1 in qualifying purchases.

But a $50 gift card requires 20,000 points, which requires cardholders to spend a whopping $20,000 to obtain.

So it's no better than the Wells Fargo deal.

Bottom line: When you read the fine print on how the system works, you'll probably be surprised at how much you have to spend to earn even a meager reward.

Question 2. Are programs that offer cash rebates better?

Yes. You can usually earn a 1% cash rebate from the debit card reward programs that offer them.

Unfortunately, those reward programs often come with rules that limit how much you can earn.

Some cap the amount you can get each year at a few hundred dollars.

Others reduce the rebate if you don't maintain a minimum balance in your checking account.

Bottom line: It never makes sense to pick a checking account based on its debit card reward program. Use our 7 smart moves to get great checking to make the right decision.

Question 3. What transactions qualify for points or cash back?

Banks charge merchants higher fees when debit cardholders sign for purchases rather than use a PIN.

For that reason, many reward programs only count signature-based transactions toward points, although online purchases, automatic bill payments and other non-PIN transactions may also qualify.

Those banks that do count PIN transactions often award fewer points for them.

Bottom line: If you're going to participate in a debit card reward program, you've got to be willing to sign for as many purchases as possible and stay away from those keypads.

Question 4. Is there an annual fee?

Debit cards are usually free with your checking account.

But many debit card reward programs charge an annual fee, usually $12 to $55 a year.

If that's the case, you'll have to spend thousands of dollars a year with your debit card just to earn enough in rewards to cover the cost of the program.

Bottom line: Don't join debit reward programs with annual fees.

Question 5. Do I have a credit card that rewards my spending more generously?

Credit cards are more lucrative for banks than debit cards, so it's not surprising that their reward programs are usually a better deal.

American Express Blue Cash, for example, offers cash back rewards of up to 5% on essential purchases like gas and groceries if you spend more than $6,500 during the year.

Someone charging $20,000 during the year and spending half of that amount on essential purchases gets back $470.

That's a lot more generous than a $50 store card you get for spending the same amount with a typical debit card.

Bottom line: You'll earn rewards more quickly with almost any credit card program than with almost any debit card program.

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