For years, consumers have been told that debit cards have more benefits than credit cards. Debit card users don't run the risk of going into debt and damaging their credit score like they do with credit cards, so the story goes. But some experts are beginning to question that logic. For consumers who diligently pay off their credit-card balance each month there's little reason to use debit cards, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site. They won't incur interest rate charges, or late fees, and they can avoid annual fees by using credit cards that don't charge them.
The reason boils down to rewards. During the recession, credit-card rewards programs were cut back significantly but they started to make a comeback about a year and a half ago. This year, competition has intensified, and credit-card rewards are becoming more generous while debit-card rewards are fading. Credit-card rewards have become attractive in part because they're not subject to the new lower interchange fee that debit cards have, says Feddis. Chase, for instance, offers 1% cash back on all purchases made with its credit cards -- twice what its now-defunct debit rewards program paid. (Two Chase cards offer up to 5% cash back on certain purchases.)
Meanwhile, Capital One's Venture credit card lets users rack up airline miles quickly. A cardholder who charges $20 will get 40 airline mile points. Compare that to the Capital One Rewards debit card that awards between 5 and 20 airline mile points for a $20 purchase. A Capital One spokeswoman says changes in the debit landscape have had no effect on its credit-card marketing activities and that both cards launched prior to regulatory changes that impacted debit cards. She adds that debit-card rewards also accumulate when consumers arrange for direct deposits to their checking account and use the account to pay bills online.
Just something to think about.