Debit vs. Credit: The Plastic War Heats Up

As debit cards become less appealing, banks are rolling out some of their best credit card offers.

For customers angry about rising debit card fees, banks are promoting an alternative that, they say, is just as convenient, but with lower fees and better rewards. They call it a “credit card.”

Until recently, debit cards have been popular among consumers, offering convenience without the risk of going into debt and, often, generous rewards programs. But as banks have cut back on debit card rewards and, recently, started imposing fees, credit cards have begun to look attractive by comparison. Several banks have actually sweetened their credit card rewards programs; Discover will eliminate charges for cardholders traveling abroad as of Nov. 6. And interest rates are low: The average fell to 12.28% in August, the lowest it’s been since February, 2009, according to the most recent data from the Federal Reserve.

At least one bank seems to be encouraging its customers to make the switch from debit to credit. Last month, Bank of America announced that it was discontinuing the rewards program on its Merrill Lynch debit card, which is used by its brokerage clients. Those cardholders have until May to redeem their rewards — or they can transfer their rewards to the Merrill Visa Signature credit card. A Bank of America spokeswoman says the bank isn’t steering clients to credit cards but only offering them the alternative.

It’s part of an overall push by banks to attract new credit card customers, says Bill Hardekopf, chief executive at, which tracks credit card offers. After taking losses on credit cards during and after the recession, banks are once again seeing potential in credit cards. Just 3.5% of cardholders are a month or more behind on their payments, the lowest level since 1994, according to, a credit card comparison site And banks are writing off about 5.6% of credit card debt that they don’t expect will be repaid, compared to 11% a year ago. At the same time, banks now receive less money when customers pay with debit cards, while credit card revenues remain unchanged.

For consumers who don’t carry a balance and care about rewards, the right credit card may be a better option. After ending its debit card rewards program this year, Chase still offers at least 1% cash back on three of its credit cards — twice what the now-defunct debit rewards program paid. Bank of America’s debit cards still offer rewards for travel with Alaska or US Air, but the bank recently improved its Bank of America Cash Rewards credit card to pay up to 3% cash back on purchases.

Not every card is as generous. In some cases, cardholders have to spend a lot to get the best rewards. For example, Chase recently enhanced the rewards program on its Sapphire credit card, which gives new cardholders 50,000 points — good for $500 in cash or $625 in travel — but only if they spend $3,000 in the first three months. Chase says its rewards cards require a certain level of engagement before the full rewards are granted but that cardholders can earn regular rewards right away. And many rewards credit cards can carry an annual fee or charge a higher interest rate than a plain vanilla card.

Regardless of rewards, some customers may not want to risk running up debt, but there are strategies to avoid this. Most credit card companies will allow cardholders to set up an alert when their balance hits a certain level, says Odysseas Papadimitriou, chief executive at CardHub. Consumers can also sign up for automatic monthly payments, allowing the credit card issuer to withdraw money from their checking account equal to the balance owed. That avoids interest charges, but does risk overdraft charges for consumers who cut it close. Alternatively, a debit card — even one with a monthly fee or a non-existent rewards program — may be a better option if it keeps shoppers out of debt.