Reward Checking Account Allows Credit Card Instead of Debit Card Purchases

One downside with reward checking accounts is that it requires debit card usage to qualify for the high interest rate. Many savers prefer credit cards over debit cards since credit cards are generally safer. If your credit card is compromised, you just report the fraudulent charges to the issuer. No money is removed from your bank accounts. However, with a debit card, money is removed from your checking account. If it's a fraudulent charge, you have to fight to get your money back.

Today I came across one credit union that is now allowing credit card purchases instead of debit card purchases to satisfy the requirements for its reward checking account. The credit union is Southwest Airlines Federal Credit Union, and its LUV Reward Checking requirements can be met with either 15 debit or credit card purchases. At first I thought this might just mean that members can use their debit card with the credit option (non-PIN). However, it clearly states in the SWACU's Visa Credit Cards page that "you can even use your SWACU credit card to earn qualifications for LUV Reward Checking."

SWACU didn't need to make this reward checking account any more appealing. It's already the top reward checking account in the nation with a 4.00% APY for balances up to $25K as of 11/21/2012. Unfortunately, not many people are eligible to join this credit union. You have to work for either Southwest Airlines or one of the other companies in the credit union's Select Employee Groups. The credit union's Field of Membership doesn't appear to include any association that can be joined. I last reviewed the credit union in 2010. At that time only debit card purchases could be used to qualify for the high rates.

When the Durbin Amendment was implemented last year which capped debit card interchange fees, I thought credit cards may replace debit cards for reward checking accounts. Even though capped interchange fees only applied to large banks, there was still risk that interchange fees would be reduced even for small banks.

From my reward checking contact, I learned that it won't be easy for credit unions and community banks to add credit cards to their reward checking accounts. One reason is that a credit card with a rolling balance is, essentially, a loan. This can allow banks to earn more revenue from interest, but it adds risks to the banks' loan portfolios. There's also an added operational cost with credit cards. Banks often resell/rebrand another institution's card (in an arrangement called an "agent" program), but this cuts into the interchange revenue for the banks and it makes integration into a reward checking account difficult.

I'm not sure how SWACU was able to overcome these difficulties. With only $257 million in assets, it's not a large credit union. It's a good sign that we may see other institutions adding credit cards into their reward checking accounts. If you know of others, please leave a comment. Let's hope that the reward checking rates and balance caps remain high enough that we will still be interested.