Debit rewards programs have been an easy way to earn an additional fraction of a percent for basically doing nothing — just choosing “credit” instead of “debit” when swiping your card to pay. I first posted about these programs way back in 2005.
Last year as part of the financial reform legislation passed by Congress, the Federal Reserve was given the power to cap card swipe fees, which were the banks’ source of funding for debit rewards programs.
When a credit card offers rewards like “1% cashback,” this is funded by the interest rates they charge the folks who don’t pay off their balances in full every month (and it’s offset in part by annual fees that some rewards cards charge). But the debit rewards programs were funded by swipe fees which the Fed now proposes to limit.
An empty threat by the Fed? At least one major bank doesn’t think so, as Chase announced it’s ending debit card rewards will end in July. Other banks are expected to follow suit.
Credit card rewards are still very much alive and well, but be warned: the Federal Reserve Bank of Chicago released study findings that showed cashback rewards cardholders carry more debt.
Shifting your spending to a cashback card only makes sense if you’re paying off your balance in full each month… otherwise the interest you pay offsets the cashback earned. But if you can be disciplined enough to pay off your account in full every month, cashback cards are free money (assuming it’s a no-fee card like Upromise’s).