Rewards Come Back To Debit Cards, But Is It Worth It?

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It used to be that you could earn rewards from either your credit card or your debit card. These rewards, which could come in the form of points, miles, or cash back, were possible due to the fees that the card issuers were allowed to charge merchants, which exceeded the value of the customer's rewards.

But in 2010, the Durbin Amendment to the Dodd-Frank financial reform legislation imposed limits on merchant fees that can be charged by debit card issuers, but had no effect on credit card issuers. So without the revenue to support their rewards programs, debit card issuers quickly dropped these benefits, leaving credit cards as virtually the only way for consumers to earn rewards for their spending.

American Express Brings Back Debit Card Rewards

In the last five years, there has been tremendous growth in the market for prepaid debit cards as many Americans have become averse to credit card debt.  Not to be left behind, American Express has been offering a range of debit cards affiliated with major retailers WalMart and Target, as well as under their own brand, Serve.

American Express has just introduced a new version of American Express Serve Cash Back that offers 1% cash back on all purchases. But unlike some of the other versions of their debit cards, this version requires a monthly fee payment of  $5.95. Therefore, cardholders would have to make at least $600 a month in charges in order to come out ahead.

While this new card is mercifully free of most other fees, cardholders will incur cash reload fees of up to $3.95 when they choose to add cash at retailers like CVS, Walmart and 7-ELEVEN stores. Alternatively, they can add money at no cost through their bank accounts or via direct deposit from an employer.

How Serve Cash Back Compares to Credit Card Rewards

In the credit card market, 1% cash back was once considered to be the standard rate of return. But today it's about the bare minimum cardholders can expect from the least competitive rewards credit cards, which are typically offered with no annual fee. In contrast, the $5.95 monthly fee charged by this version of the Serve card equates to a massive $71.40 in annual fees, as much as many premium rewards cards that offer far more valuable returns and benefits, such as 5% cash back.

Yet for no annual fee, you could have cards like the Citi® Double Cash Card – 18 month BT offer, which offers 2% cash back on all purchases, or the Capital One® Quicksilver® Cash Rewards Credit Card that features 1.5% cash back on all purchases. The Discover it Miles offers 1.5 miles per dollar on all purchases that are worth one cent each towards travel statement credits or cash back.

Who Should Get Serve?

When you compare Serve against competitive cash back credit cards, the Serve card with cash back does not even come close. But then again, Serve is not a credit card and it's not designed to compete in that market. As a prepaid debit card, Serve offers features you won't find available with any credit card. For example, there's no credit requirements to get approved for a Serve card, and as a prepaid card, customers can never incur debt. Furthermore, Serve cardholders enjoy other benefits such as online bill payment and free ATM withdrawals. And of course, having a prepaid card means that you will never have to remember to pay a monthly bill.

So the ideal customer for this new Serve card is someone who is unable to be approved for a credit card, or is uninterested in having one. At the same time, Serve cardholders should consistently be exceeding $600 in monthly spending in order to come out ahead on the 1% cash back. Otherwise, cardholders would be better off using another version of the American Express Serve Card, Target, or Walmart prepaid cards, or just use a prepaid card from another company with no monthly fee.

So long as the Durbin Amendment remains in effect, prepaid debit cards will never offer as much rewards as the well-known credit cards, but it's good to have some chance to earn rewards. By comparing the top credit and debit card offers, you can find the product that best meets your needs.

* Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.

*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.

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