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How to Choose the Most Rewarding Type of Card

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As more consumers turn to plastic, banks have revived rewards programs on checking accounts and debit cards to better compete with credit-card issuers, and that means consumers have more to choose from to earn rewards on everyday transactions.

A third of all credit unions and 37% of banks offer a debit-card rewards program, Ron Shevlin, an Aite Group senior analyst, said on his Snarketing blog in May. He said most of the institutions that offer them – about 60% – say they help drive card use.

Wondering what option is best for you? Here’s a checklist of things to consider:

Checking/debit card rewards

To earn points through a rewards checking account, consumers typically have to make a certain number of debit-card transactions on the account each month, use direct deposit services, keep it funded above a minimum level and receive statements electronically instead of on paper. These accounts often pay interest on balances, sometimes at higher rates than on other types of accounts. But with the national average rate at 0.04%, according to the Federal Deposit Insurance Corp., finding a checking account that pays more shouldn’t be too hard. We found a 3% annual percentage yield on balances up to $15,000 at Lake Michigan Credit Union in Grand Rapids, Michigan.

Are debit rewards right for you?: For those who have debit cards, they tend to be used more by females than males, according to Federal Reserve research. A 2006 Fed study showed that 90% of women used their cards compared with 81% of men. The study also showed that these cards were far more popular with younger people than older folks. One out of five card users indicated they sought the rewards tied to the transactions.

Here are some ways you can get the most out of a debit rewards card:

Sign for it: Since banks get paid more when you make a signature-based transaction, they reward you more for it. Selecting “credit” instead of debit at checkout will help you reach the monthly minimum, if there is one for this sort of transaction.

Set up direct deposit: Many rewards programs require a certain number of direct deposits each month, and the easiest way to accomplish this may be to ask your employer to put your checks electronically into your account when payday rolls around.

What to watch out for: Some checking-account providers may limit high interest rate offers to a certain period of time or cap the amount of the balance they apply to, so ask about any restrictions before you make a commitment. Purchases that require swiping your debit card before the full amount is finalized (such as transactions at gas stations or bars) can  block a certain amount of your balance, making overdrafts – and resulting fees – more likely.

Credit-card rewards

Consumers continue to turn to their credit cards, with a 5.9% increase in use in 2013, according to the Fed. Apart from being easy to use and not immediately drawing down a deposit account, consumers can be attracted to the rewards many cards provide. Because there are a lot of cards to choose from, it’s easy to find one with rewards that complement your lifestyle.

Are credit rewards right for you?: Two-thirds of people with a household income of $200,000 or more preferred paying with credit cards, partly because of the benefits they could collect, while debit cards and cash prevailed among households with less income, according to a Fed study this year. Rewards points can be appealing to consumers at all levels of income, particularly those looking for specific types of rewards that might fit their spending habits. For instance, a frequent traveler could benefit more from using a credit card that offered air miles as rewards.

Here are some ways to get the most from your credit card:

Focus your spending: Your rewards will pile up faster if you use no more than one or two cards.

Choose credit first: If you use your credit card as your first choice of payment, especially for big-ticket items, you’ll earn more rewards.

Pay your bill in full: Limit your credit card use to no more than you can cover each month, or you may wind up paying more in interest costs than you collect in rewards. You may help make your card issuer’s loyalty program more profitable but you’ll be negating the reason you joined it.

What to watch out for: While there are several credit cards with great rewards programs and low interest rates, there are also many with unscrupulous practices that could ruin your credit. Be wary – read the fine print and make sure you understand it before you sign up.

The Bottom Line

About two-thirds of all non-cash payments were made with either credit, debit or prepaid cards in 2012, while the portion made by personal check continued to fall, according to Fed research. Debit-card transaction fees paid to larger banks dropped by about half after the so-called Durbin law of 2010 capped such charges, sharply reducing revenue from card use. That in turn may have undermined the economic rationale for promotions such as rewards programs.

Choosing whether to get benefits for using a credit card or a checking account/debit card all comes down to what method of payment makes you comfortable. Instead of basing that decision on rewards, take a look at your financial goals and think about what option best suits your needs and lifestyle. That will be more rewarding over time than selecting a card because of perks promised down the line.

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