How do cash-back debit cards compare to rewards credit cards?

Debit cards have grown in popularity in the past couple of decades. In fact, according to a Federal Reserve study, debit cards accounted for 56% of all card payments (including credit cards) in 2021.

Not surprisingly, debit card reward programs are also becoming more prevalent. In 2018, 40% of debit card users received rewards for their everyday purchases. This number increased to 46% in 2020. Moreover, 33% of cardholders claim that they are motivated to use a card in order to get rewards according to the Payments Journal.

Despite this recent growth, debit card rewards seem to have historically “played second fiddle to” credit card rebate programs. For example, 59% of U.S. adults carry at least one credit card that offers rewards according to Synchrony Bank.

You earn more rewards with credit cards than debit cards, often double

For as long as I remember (and I’ve covered the industry for 25 years), the earn rate of rewards credit cards has generally been much more aggressive than reward debit cards. This disparity can be clearly seen when you look at cash-back programs.

If you have a cash-back credit card, your earn rate is simply the rebate percentage you earn on purchases. For sake of simplicity, let’s focus on cards that give you a flat-cash rebate on every purchase you make (meaning that your rebate percentage doesn’t vary based on how much you spend or what kinds of purchases you make).

Cash-back credit cards typically earn a flat rebate of up to 2% on purchases while similar debit cards typically only earn up to 1%. Basically, you can normally earn double the cash back by using a credit card instead of a debit card.

For instance, you can earn 1% cash back on up to $3,000 in monthly purchases with the Discover cash-back debit card. In contrast, you can earn a 2% cash rebate (unlimited 1% when you make a purchase, and another 1% when you pay the minimum due on time) with the CardName with no monthly caps on the rewards you can earn. (Citi is a CardRatings advertiser.)

Similarly, airline reward credit cards often allow you to earn twice as many frequent flyer miles as debit cards. Case in point, you can earn at least 1X mile, and in some cases 3X miles, on eligible purchases with the CardName discontinued. (Earn 3X the miles on purchases directly with Delta as well as on purchases directly with hotels and 2X the miles on purchases at restaurants – including delivery and takeout in the U.S. – and at U.S. supermarkets. Earn 1X mile on all other eligible purchases.) In comparison, you will only earn one mile in rewards for every $2 you spend with the Delta SkyMiles Debit Card. (American Express is a CardRatings advertiser. )

BONUS TIP!

Not all debit card rebate programs lag behind their credit card counterparts. The popular Target RedCard gives you a 5% rebate on Target purchases on both its debit card and credit card. While I love my 2% cash-back credit card, I have personally used the Target debit card for many years (only at Target) and have earned hundreds of dollars in rebates in the process!

Pros and cons of cash-back debit cards

One of the best ways to find out if a cash-back debit card is a good fit for you is to learn some of the advantages and disadvantages of using one. Dr. Mary Ann Campbell, an “Edu-tainer” who teaches personal finance through engaging magic tricks, and Ruth Susswein, Director of Consumer Protection for Consumer Action, helped me compile some bullet points.

Pros:

• You can only spend the money in your checking account (unless you have overdraft protection) and you won’t be charged interest or finance charges, which means it’s very unlikely that you will get into significant debt.
• You can normally qualify for a debit card even if you have a poor credit score.
• You’re less likely to get charged an interchange fee when you use your card, which happens sometimes with credit cards and can be as much as 2-3% of your purchase price.
• This is more of a general pro to debit cards overall, but debit cards allow you to make cash withdrawals from an ATM or at a store register, whereas credit cards charge a large fee and high interest rates for this action.

 ➤  LEARN MORE:Can you get cash back with a credit card?

Cons:

• It’s tempting to use your card more than your budget allows in order to earn more rebates (same temptation applies to credit cards).
• Lack of consumer protection (in comparison to credit cards), such as personal liability related to fraud.
• You can not build or rebuild your credit since debit cards don’t report to the three major credit bureaus.
• You could get dinged an overdraft fee if there is a negative balance in your checking account linked to your card. The cost for overdraft fees is usually around $35 per transaction according to the FDIC.
• You might get hit with a monthly fee if the balance in your checking account falls below a certain dollar amount (sometimes you can avoid monthly fees if you receive payment by direct deposit or if you use your debit card a certain number of times a month).

Susswein adds that you should also consider “how much it is going to cost you to get cash back, meaning what are the fees with this debit account — are there monthly fees, ATM fees, etc.? Is there a cap on how much cash you can earn?”

Finally, you’ll want to know if you can earn more cash back for purchases that you sign for (a signature transaction) as opposed to purchases that you make with a PIN. Generally, if you sign your receipt while making a purchase instead of using your PIN, you will earn a higher rebate.

BONUS TIP!

If your debit card gives you a higher rebate for signature transactions, you can simply tell the clerk when checking out that you want to choose credit (instead of debit). If you choose debit, you will likely be required to enter your PIN number and, thus, will earn a lower rebate.

Pros and cons of credit card reward programs

As mentioned above, perhaps the biggest plus is that you can earn greater rebates with credit cards. I personally love my 2% cash-back card and use it for practically everything.

However, there are also significant downsides, such as the potential for card debt, that can outweigh any rewards that you might earn. As a result, it’s best to carefully weigh the upsides and downsides before you jump on the credit card reward bandwagon.

Pros:

• Aggressive rebates- as much as 5% on certain types of purchases.
• Generous sign-up bonuses when you apply that often are valued at hundreds of dollars (free airline tickets, cashback, etc.).
• Reports your monthly payments to the three major credit bureaus, which can help you boost your credit score when the cards are used responsibly.
• Additional consumer protections as noted above, including the fact that credit cards are not directly linked to your personal checking account (which can be particularly helpful in the event of fraud).
• Ability to carry a balance. Credit cards are helpful if you need a little extra time to pay off purchases when you don’t have immediate cash flow, especially if they offer an intro 0% APR promotion. That said, unless you’re taking advantage of such an offer, it’s really best to pay off your balance in full each month, which leads to the first con…

Cons:

• The potential to pay interest or finance charges, which can easily lead to debt. According to Campbell, if you pay less than 100% of your card balance in any given month, any interest charged will more than likely cancel out the benefit of the rewards offered with a card.  If fact, you could end up paying much more in interest.
• You usually need good credit to qualify for rewards credit cards. Rod Griffin, Senior Director of Consumer Education and Advocacy for Experian, explains that “credit scores of 700 or above are generally considered ‘good’ by most credit scoring algorithms” and that card issuers generally use this to make approval decisions.

A final related warning is that rewards cards, by nature, are designed to entice you to spend more. You have to practice discipline when using them and strictly stick to your monthly spending plan or budget.

Susswein uses humor to underscore this warning. “We need to keep an eye on our spending to be sure we don’t pay interest on a dinner we digested weeks before the bill arrived!”

BONUS TIP!

If you have bad credit, don’t assume that you will never be able to get approved for a rewards credit card! Griffin notes that “there are steps you can take to improve your credit score. Start by getting a copy of your credit report along with your FICO Score.”

He then advises that you “pay attention to the factors most influencing your score, including things such as missed payments or high balances. You can also get credit for paying your cell phone, utility, video streaming service, rent payments and more through Experian Boost.”

 ➤  SEE MORE:How to start building credit

Which is better: a cash-back debit card or rewards credit card?

Deciding which type of card is best for you may seem confusing if you’ve never used a rewards card. The good news, though, is it isn’t rocket science and the old sayings that “it all depends” and “there is no wrong answer” definitely apply.

The key is to “know thyself” as an ancient Greek philosopher once said. If you think that using a credit card will tempt you to spend more, a debit card is probably the better way to go.

If you are financially disciplined (and have good credit), then why not take advantage of the enhanced rebates of a credit card (not to mention the other benefits)? Susswein adds that you should “consider the type of spender you are and as always focus on the fine print — that’s where the real offer lies.”

Finally, be savvy and consider the overall financial benefit to you before you decide which card is best. This includes considering card benefits that might be overlooked.

BONUS TIP!

If you’re not sure if you’re disciplined enough to handle a reward credit card, then I would advise that you first use a basic, no frills card (as in no rewards). If you can prove to yourself that you can pay off your monthly balance in full for a year or so, then reward yourself (pun intended!) by graduating to a rewards credit card.

Final thoughts

Using rewards cards, whether debit or credit, can be fun and, more importantly, can really help improve your bottom line. The good news is that you can have both in your wallet. As I mentioned, I use my Target debit card in order to get 5% off my Target purchases and I basically use my 2% cash-back credit card for everything else.

The key is to find a strategy that works for you- one that best matches your lifestyle and spending habits. You can always reexamine your strategy and make adjustments as needed. In other words, you’re not “married to your card” and can make changes on the fly.