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Rewards Grow with Debit Card Use

As more consumers whip out debit cards, issuers are rolling out new rewards programs and enhancing old ones in hopes of boosting card spending.

Integra, a Midwestern bank, introduced its first debit card reward program in July. Sovereign launched a debit rewards program late last year. And credit unions such as Addison Avenue Federal - whose customers are employees of high-tech companies - are offering new perks if consumers use debit cards a certain number of times a month.

Debit card transactions have grown rapidly in recent years, but the recession has accelerated the trend. In the fourth quarter of 2008, U.S. debit spending exceeded credit card spending for the first time, says Visa. That continued in the first quarter of 2009 with $202 billion in debit card purchases and $176 billion on credit cards.

"With the economic downturn, people are looking at how to manage their money and . . . turning to the debit card to give them more structure to their spending," says Julie Bohn of First Data, which processes payments.

Yet Brian Riley, a research director at TowerGroup, a research firm, believes that debit card use will continue to grow as the economy recovers. Debit cards provide a convenient way for consumers to pay for their purchases, he says. Banks are also making it more rewarding for consumers to use their debit cards in hopes of boosting profits. When consumers use debit cards, merchants have to pay banks up to 2.1% to process the transaction, says The Nilson Report.

Benson Porter, CEO of Addison Avenue Federal, says the credit union launched a checking account in July 2008 to pass along some of the income it receives when consumers use debit cards. Customers earn 3.51% on their money in Addison's Dividend Rewards checking account if they make at least 12 debit card purchases a month, agree to get online statements and make one electronic deposit a month, says Porter.

Meanwhile, Integra and Sovereign have programs that offer customers cash back when they use their debit cards at retailers such as Barnes&Noble, Gap and Starbucks.

One drawback of debit cards: steep overdraft fees. The Federal Deposit Insurance Corp. cautions consumers to avoid unnecessary spending that could negate rewards. Most banks allow consumers to overdraw using their debit cards - even for small purchases - then will charge a fee of up to $35.

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