Don’t Let Spending Caps Curb Your Cash Back

If you're a big spender, the best cash-back strategy isn't always to seek out the juiciest advertised rewards rate.

Gregory KarpJune 6, 2017
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How the Wrong Cash-Back Card Can Cost You

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If you're a big spender, the cash-back credit card with the juicy advertised rewards rate isn't necessarily your best bet.

Why? Many cash-back cards have spending caps. After you hit the limit, they revert to a mundane 1% rewards rate.

With the wrong card, heavy credit card users could lose out on hundreds of dollars per year in rewards. A better choice might be a card that offers lower, but unlimited, rewards that keep flowing no matter how much you spend.

When 2% beats 5%

Consider cash-back cards with rotating bonus categories. Several offer a whopping 5% back in quarterly spending categories, which have included gas stations, restaurants and department stores in the past. Those accelerated rewards are limited by where you make purchases, and they're often capped. A typical limit of $1,500 in quarterly spending means you can earn $75 at most (or $300 per year) before the card returns a pedestrian 1%.

» MORE: Battle of the 5% quarterly category rewards credit cards: Chase Freedom® vs. Discover it® Cash Back.

By contrast, the best flat-rate cards return 2% and offer unlimited rewards.

Say you spend $5,000 per month on a rewards card. Here's how your rewards would shake out with both types of cards:

  • 5% bonus-category cards: Maxing out the bonus categories earns you $300 per year, and you'll earn $540 from all other spending for a total of $840. Note that maxing out quarterly rewards can be difficult.

  • 2%-on-everything cards: You'd earn $1,200 cash back annually without having to remember any categories. Even a 1.5% cash-back card returns $900. (Calculations ignore new cardholder sign-up bonuses.)

If you spend $60,000 per year ($5,000 per month) on a credit card, you’re better off with a good cash-back card that offers lower rewards rates with unlimited earning. If you spend less, using a 5% card could still earn you a respectable return.

Example card

Cash back rewards

Annual rewards on $5,000/month in spending

5% in bonus categories up to $1,500 spent per quarter, 1% all other spending

$840

1.5% on all purchases

$900

1% on purchases, plus another 1% when paying them off

$1,200

Two-card optimizing

If you’re willing to use two cards strategically, you can get the best of both worlds. Use the card with rotating bonus categories only when purchasing from merchants in those categories, earning 5% back. Then use a flat-rate card for all other purchases.

Assuming the same $60,000 in annual spending — and assuming the flat-rate card you're using offers 2% on everything — a two-card strategy could earn you $1,380 annually. (Maxing out the bonus categories earns you $300 per year on $6,000 of that spending, and you’ll earn $1,080 on the other $54,000 in spending.)

Of course, you could further optimize by using more than two cards. But you'd have to decide whether juggling them all is worth it.

Nerd tip: This discussion assumes you’re a good candidate for a rewards card, meaning you pay off the balance each month. If you don’t, your interest rate is more important than rewards. Consider a 0% balance transfer or low-interest card.

If you’re a high-volume credit card spender evaluating offers, look past the headline rewards rates and into the fine print of spending limits. Are you likely to tip your cap? If so, you might find that less is more.

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