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Ask the expert: Are debit or credit card rewards programs better?

March 08, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I've been having a debate with my wife about card reward programs. We have a checking account with a debit card reward program, and a credit card with a reward program. The credit card program accumulates points more quickly, but I say that's offset by the interest you have to pay on a credit card. Which is the best way to get the most out of these programs, when all the other costs are considered?

A: If the credit card program is more generous (which is often the case), then that's the one to use--with one important condition.

You are correct about the trade-off between a generous rewards program and interest payments, and that is the kind of trade-off that often confuses consumers. This is because quantifying interest and reward points in the same terms for comparison purposes is like a comparing apples and oranges--it's difficult to do.

However, you can render this comparison irrelevant simply by paying off your credit card balance every month. If you are weighing using a debit card or a credit card as equally viable options, it indicates that you have enough money in your checking account to pay your bills every month. That's as it should be. So, the interest rate on your credit card should never have to enter into consideration. Use the credit card, pay the full balance on time every month, and you can collect the more generous rewards without any offset in terms of interest paid.

There are a couple side benefits to this approach. One is that it should make record keeping for your checking account much simpler. The second, and potentially more important, benefit is that it helps protect your checking account. There is a risk of information theft with both credit and debit cards, but since a debit card is linked directly into your checking account, the consequences are potentially more serious.

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