Which card to use now?
October 20, 2011
Q: My bank just eliminated the rewards program on my debit card, and I'm wondering what's the best alternative. I have a few department-store credit cards, which I think offer some kinds of incentives. Should I use those, find a rewards credit card, or just stick with my debit card, with or without the rewards?
A: The new cap on interchange fees for debit card transactions has led some banks to eliminate their rewards programs simply because they don't expect those cards to be as profitable for them going forward. But as you point out, you can get incentives from both store-specific cards and national rewards credit cards. Here are two things you should consider in making this decision:
- Size of rewards. Top rewards typically range from 1 percent to 5 percent of your card purchases.
- Flexibility. A disadvantage of store-specific cards is that they may limit where you spend your rewards. All things being equal, cash-back cards give you the most flexibility, but sometimes rewards for specific purchase categories or for items from particular stores are especially generous.
You'll notice that interest rates are not listed as a factor in this decision. That's because rewards cards really only make sense if you pay your balance in full every month. Otherwise, the interest you pay will counteract the benefit of earning rewards. If you don't pay your balance off every month, you'd be better off looking for a non-rewards card, since these typically offer lower interest rates.
As for sticking with your debit card, this is a completely different animal because it links directly into your checking account. That can be both good and bad. Have purchases come directly out of your checking account eliminates a bill-paying step. On the other hand, it also exposes your checking account to fraud if your debit card gets lost or stolen.
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