By Matt
Credit card reward programs have become so prevalent in recent years that consumers expect — even demand — that they should be receiving something in return for spending money (something besides the item they are purchasing). As rewards programs have become the norm, and paying with cash is becoming more obsolete, banks now offer cashback debit cards as an incentive to use their product. Reward debit cards have much in common with their credit card kin, but it is important to understand exactly what your card is offering in order to evaluate it.
How does a cashback debit card work?
Cashback debit cards redeem a percentage of purchases made by the consumer. The cash reward is made available by check or it can be credited back to the cardholder’s checking or savings account. Typically the account holder must accumulate a specified amount of money before she is able to request a payout. In some cases, points are earned for making purchases and can be converted into cash or gift cards for specific retailers. Many banks require the account holder to carry a minimum balance in order to be eligible for reward programs.
Why should my bank pay me to spend my money?
The answer to this question lies in the system by which banks charge (earn?) fees. Most cashback debit cards only offer the reward on pin-less transactions. These are transactions where a signature is required rather than a pin number. When the transaction is being made, the consumer selects the credit option on the pin pad and signs for the purchase.
There is no difference to the consumer because the funds still come from a bank account. The difference to the bank is the amount that they charge for the two different types of transactions. Debit purchase fees are governed by legislation and are a fraction of the 1.5% – 4% of the transaction that is charged to a business for accepting a credit card payment.
Essentially, the bank is giving you a cut for using a method of payment that costs the retailer more money. It’s a win-win proposition – unless you’re the retailer.
Cashback: Debit Versus Credit
For the most part, debit card reward programs are not as lucrative as credit card reward programs. So why not just stick to using your credit card and earn cash faster? For starters, debit cards use money that is sitting in your bank account, whereas a credit card transaction is a loan that must be settled with the credit card company. Avoiding credit cards is one way of avoiding debt. Credit card companies can charge up to 24% interest on unpaid balances. Many credit card reward programs charge an annual fee which will offset any reward depending on how much you use the card. Also, some people may not qualify for credit cards, while others are simply anti-credit.
Deciding whether a cashback debit card is right for you involves considering whether the structure of the program makes sense from your financial situation. A good rule of thumb is to determine if you already spend in a way that compliments, or optimizes rewards. If you have to change your spending habits to make it work, then it doesn’t work for you.
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