Dedicated to Deposits: Deals, Data, and Discussion

Debit Cards, Credit Cards and Reward Checking Accounts

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With savings account and CD rates plummeting, reward checking accounts may start to look more appealing to people who had not considered them before. Many of these accounts are still paying over 5% for balances up to $25K. The main issue some people have with these accounts is the debit card usage requirement. All reward checking accounts require that you make around 10 debit card purchases a month to qualify for the high yield. Besides the hassles with making 10 or more debit card purchases, there's the concern about fraud. For credit cards there are protections under the law. In addition, fraudulent charges made on credit cards aren't directly debited from your checking account. Here's some commentary on debit cards from consumer advocate Clark Howard:
If you discover false transactions on your credit card, you're protected under the law, right? But what about your debit card? There's nothing required in current regulations to forbid your bank from charging you NSF fees if a thief steals your debit card. Your bank is only required to restore funds -- they're not required to waive any bounced check charges. Shame on the banks.

Last month, Flexo posted on his blog Consumerism Commentary an interview with a Visa representative regarding debit cards. His first two questions concerned the issues of fradulent charges and consumer protections. The Visa representative mentioned its Zero Liability policy. One important note regarding this policy is that you only qualify if you sign for purchases (choose the credit option rather than debit). Signature-based purchases using a Visa debit card are processed over Visa's network, but PIN-based transactions may not be.

Flexo just posted some additional Q&A's from Visa that deal with other issues for comparing the trade-offs between debit cards, credit cards and cash. His 5th question dealt with debit card rewards. Some banks and credit unions have started various credit-card-like reward programs for their debit cards. In these programs you get some percent back in cash, air miles, etc. for each dollar you spend with the card. Bank of America's Keep the Change Program and Wachovia's Way2Save are a little different but they essentially reward customers for making debit card purchases.

The high yield reward checking account is another type of reward program. What can make this better than the credit-card type of reward program is that it favors savers over spenders. For cash-back credit card rewards, the more you spend, the more you make in rewards. For reward checking accounts, the amount of the rewards depends on your checking account balance instead of how much you spend. You only have to meet the required number of monthly debit card purchases. If you maintain $25,000 in the checking account and meet the requirements for a year, you could potentially make $500 more than what you would have made in a high yield savings account. This assumes that the reward checking account maintains an interest rate 2% higher than your savings account which may be a little optimistic.

Related reward checking posts and resources:


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Comments
24 Comments.
Comment #1 by Anonymous posted on
Anonymous
To me, it is much easier to use a Reward VISA, Mastercard or American Express Card rather than a Debit card. Not only does the money to pay for the purchase sit in my bank savings account for up to 50 days longer (earning interest) than a debit card, but I get a payoff of between 1% and 3% INSTANTLY on the money I spend (depending on the card and type of purchase) AND I get the protections offered by using credit instead of a debit card. I buy absolutely everything I can with my reward credit cards, including utilities, insurance, food, gas, etc.

I find it their use much easier (and probably more financially beneficial in the long run) than having to pay close attention and "work" a reward checking account and have lowered protections.

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Comment #2 by tuphat (anonymous) posted on
tuphat
Fundamental difference worth considering: do you want to be rewarded based on how much you SPEND, or on what you SAVE? If the latter, then reward checking accounts with highest rates are the way to go. The card usage requirement is a non-trivial but ultimately minor inconvenience.

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Comment #3 by Anonymous posted on
Anonymous
Not worth the hassle: multiple monthly transactions needed, increased risk of theft, overdraft risk, miss one debit and rate goes kaplooey. Just go to money-rates.com click on interest checking, find traditional interest checking accounts paying 3%. Put rest in short term CD if necessary. And be done with this additional nonsense that banks will try to scr*w you with.

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Comment #4 by Deb (anonymous) posted on
Deb
I've been using these accounts for many years now. They are a great resource for those who want some easy access to a percentage of their assets.

With regard to the debit card transactions, I keep mine as small as possible. I generally go to a store with a self-checkout area, and separately purchase very small ticket items, such as $1.00 candy, or $1.00 or less canned goods. If you go at an odd time, nobody bothers you; you can get most of the transactions done in one or two trips, and you don't have to spend more than $10-$20 dollars doing it, buying things you would ordinarily purchase, anyway.

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Comment #5 by The Personal Finance Playbook (anonymous) posted on
The Personal Finance Playbook
I agree that it's definitely safer to use a credit card than a debit card, especially if you're shopping online. Nice post. Keep up the good work.

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Comment #6 by Anonymous posted on
Anonymous
First, thank you very much for this blog. It is a daily reader for me.

As to using rewards checking though, I was all set to go and then looked at the spreadsheet. If you get say a 2% greater reward than on a straight checking or a short term CD, then that is a bit over $40 a month on $25K on deposit, seemingly the normal max. That translates to $4 and change for each transaction. And **** up once and you have lost that extra earnings not just for the month but for the month before as it seems that the default rate is 2% less than a short term CD rate.

Now I hadn't thought about visiting a self checkout line at say a Walmart at night like Deb said and doing 10 quick $1 transactions, but is it worth it for the $40 bucks? I am not sure that it is for me.

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Comment #7 by Anonymous posted on
Anonymous
There are fundamental differences between using a credit versus a debit card. The obvious one is that for a credit card, you are not transacting with your own funds while for a debit card it comes straight out of your account. One other major difference is that at least for some credit cards, you can earn money by using it. For debit cards, that NEVER is the case. So these reward checking accounts are in essence, the rebate payback to the customer for using a debit card. Disputing a debit card purchase is much more difficult than a credit card one. Also, the earlier comment about satisfying the purchase requirements by making a lot of small amount purchases every month - some of the reward checking accounts websites indicated that a repeated pattern of small amount transactions could allow the bank to void the account if they detect that pattern by the customer.

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Comment #8 by Anonymous posted on
Anonymous
I use a combination of Credit Rewards and Reward Checking Accounts. That way, I earn interest on my purchases as well as my checking account.

Banking Trend News I found interesting: December Data Confirms Community Banks Winning Battle for Deposits

Highlights of the study include:

1. Deposits in REWARDChecking accounts jumped another $183 million in December.

2. Demand deposit accounts are now being offered by 477 community financial institutions across the country, an 82% increase in the network from a year ago.

Follow link for the original report:

http://www.msnbc.msn.com/id/28757512/

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Comment #9 by Anonymous posted on
Anonymous
I have one credit union rewards checking account that until recently paid high rates up to $50K, not $25K as is the norm. It has the usual requirement of 10 debitcard transactions/month. One month, as a test I individually bought 12 packages of Raman noodles that were on sale for 10 cents apiece at my local Cub Foods self-checkout - took a grand total of 5 extra minutes on my way to work (I leave early in the AM, so no other customers were around). The next month I epaid the first part of my cable bill $1.xx at a time via their secured website - took maybe 10 extra minutes all told that month. Results - no flak whatsoever from that CU for making small payments, in return for well-over-market yield. (Caveat - if you epay via debitcard ensure your PC security is good, but this is basically true with any web access you do....)

The only downside is - can anyone use 12 small, hard bricks?

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Comment #10 by Rick (anonymous) posted on
Rick
I have two rewards checking accounts each paying 5% and each needing 10 transactions a month. As I eat out for lunch every work day I get most of my transactions this way, from $1 to $6. Some days I have a co-worker use one card while I use the other. After several purchases he pays what he has "borrowed". For large purchases I use my cash back credit card. It takes little effort to keep track to make sure you get the full interest rate.

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Comment #11 by Doug (anonymous) posted on
Doug
Before I got into Rewards Checking, I got mediocre interest from my HYSA, I always had to minimize funds in my checking acct to maximize interest while avoiding overdrafts , and it was a pain to pay the credit card bill each month. Now, life is way easier---great interest, no juggling, and no credit card.

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Comment #12 by Anonymous posted on
Anonymous
I now have three reward checking accounts. My monthly requirements combined is now 33 ACH transactions a month. I have resorted to the little tricks to meet the requirements too. But, because I rely on my interest earned to live on, I have found that after I do the quick transactions in the begining of the month to meet the requirements, the rest of the month I still use the cards for day to day purchases. Because I have become accustomed to using a debit card and not carrying so much cash, I find that most months I am well over the required uses.

Funny, a year and a half ago, I was certain I could never meet even 10 transactions a month. I guess it just proves that an old school, cash carrying guy like me can change for a few extra bucks a month.

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Comment #13 by gaelicwench (anonymous) posted on
gaelicwench
I've got the 6.30% with MidWest America Credit Union. Ijust need to make sure I do those 10 transactions required. I use a register-sized spreadsheet from BudgetMap.com to keep track of my expenses. There are 12 columns to list the categories - food, fuel, stamps, a few other sundries, but the last column I wrote DO NOT SPEND. This is money leftover from the categories at the end of the month. Then I start over when the 1st rolls around.

I have direct deposit going to my reward checking in my local CU. I allocate the amount I need for my monthly bills to include a few dollars since some fluctuate a wee bit. Also, in my direct deposit, it's a monthly fixed amount from my ex's retirement income; the gov't gave all military, retirees and disabled vet a 5% increase across the board. I, too, got that increase. I've taken that difference between last year's amount and this year's and am putting it in the "Do Not Spend" column. It's as if I never got it to begin with. Throw in the required transactions and the compounded interest grows exponentially.

I also have a Roth IRA that, because I am 50, I can play catch-up without penalty, so will move the money from my checking into it once yearly. Or, I can put it into my HSA (health savings acct) so I won't have to pay taxes on the interest anymore than I have to.

Sorry for the lengthy *diatribe.*

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Comment #14 by Anonymous posted on
Anonymous
Yes excellent posts by all and I agree with you. If you have lots of free time then yes this is worth it if only the difference is greater than 2% and you max at least greater than 25K in the rewards checking. Otherwise if you are buying 10 $1 items that you really don't need per month or your time is valuable then it is really not worth it. And if you miss just once or your card is hacked - you are now at a loss

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Comment #15 by Anonymous posted on
Anonymous
To gaelicwench:
If you are over 50, the current Roth annual contribution maximum amount is $6000. For HSA, the maximum participant amount varies per health insurance plan. For HSAs, you can invest the money into many choices (stock, bond, money market mutual funds as well as regular bank accounts depending on the custodian offerings). With the market tanking late last year, there were losses up to 60% for many mutual funds. So if you invested your HSA money into say, a foreign stock fund, you saw losses amounting up to over 50% on your account, And if you needed to spend that money on health expenses, the available amount of money would have evaporated over last year. For those who did invest their HSAs in the stock market, I hope that have many years of good health because they will need it in order to recoup back the money that disappeared from their accounts. But I guess that same thing happened to all of those 401(k) and retirement plan accounts as well. I opened a Roth IRA last year and deposited $3000 into one and saw it lose 40%. I guess I should have used the money to buy lotto tickets instead.

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Comment #16 by Anonymous posted on
Anonymous
To Anonymous, at 2:52 PM, January 27, 2009 - Not in Illinois, at least. In this state, the overall payout from lottery tickets averages about 50%. So statistcally, your 40% loss in stocks last year (a terrible year for stocks, to be sure) pales in camparison to the AVERAGE 50% loss ticket-buyers suffer in the Illinois lottery. Like the South the markets will rise again...

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Comment #17 by Anonymous posted on
Anonymous
To satisfy my Rewards checking account debit card use requirement, I buy 10 or 13 99 cent MP3 songs online from Rhapsody.com Or can do the same thing thru Walmart.com Works fine.. no problem. But tried doing the same thing thru Amazon.com, and they ended up combining the different individual song purchases made on the same day into one group card charge, which of course defeats my purpose.

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Comment #18 by Anonymous posted on
Anonymous
To Anonymous, at 7:43 PM, January 27, 2009 - I'm sure you realize that Amazon is combining them (and incidentally, deafeating your purpose) because this makes it cheaper for them in terms of paying lower transaction fees. To make this plan work you need to stick with the "dumber" stores you mentioned, WalMart and Rhapsody.

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Comment #19 by Anonymous posted on
Anonymous
Has anyone heard of or banking with Bank of the Wichitas? Any experience that could be shared?

Also, Evantage Bank and AmericaNet Bank seems to be sister bank of the Bank of the Wichitas since the websites are exactly the same.

Any comments?

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Comment #20 by Anonymous posted on
Anonymous
BEWARE:

Bank of Ripley makes a hard inquiry into credit history. It shows up as inquiry which could potentially lower your credit score.

I discussed with them but they flatly refused to remove the inquiry. I am ****ed off, but well, the high APY is ok.

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Comment #21 by Anonymous posted on
Anonymous
Belvoir FCU is NOT available nationwide. I called them.

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Comment #22 by Banking Guy (anonymous) posted on
Banking Guy
Regarding Belvoir FCU, did they say you have to come into a branch to open this account?

The eligibility requirements as I described in my post allow people to join via an association membership. So you should be able to qualify for membership this way unless the credit union has made changes.

Some credit unions have required members to come into a branch to open these reward checking accounts. So even if membership is open to everyone, the reward checking account isn't.

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Comment #23 by Anonymous posted on
Anonymous
The rep from Belvoir asked if I live in any of the counties specifically mentioned and since I am out of state, they said that I will not be eligible to open the account.

Also on the website, they have listed the counties in which one has to live/work/worship etc.to qualify.

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Comment #24 by Banking Guy (anonymous) posted on
Banking Guy
Thanks. I noticed I had sent a message in December about account qualifications, and I never received a reply. They do seem to want to keep this account local. I've updated my post with this info, and removed the nationwide tag. On the next update of the tables, the credit union will no longer show up on the nationwide table.

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