You’ve seen the commercials. 5% cash back for this, double points for that. These offers may sound alluring, but dive into the fine print because there are some snares and traps that can end up costing you dearly if you’re not careful.
1. Give with one hand, take with the other
Discover’s most popular card, the More, is famous for its 5% cash back. But when they say “up to 1%” on other purchases, many people don’t bother researching what that means. Well, I’ll tell you…
On spending outside of the 5% categories, you only get 0.25% (1/4 of a percent) for the first $3,000 in annual purchases. It’s only spending that exceeds this amount which gets you the full 1% cash back.
So on one hand you’re getting more, but on the other you’re getting less. If you understand this and use it strategically, then the Discover More and similar cards can still be a great deal. However if you ignore this, then you’re just leaving free money (rewards) on the table by earning less on your other spending.
2. Opting-in for higher rewards
I’m sure you’ve seen those Jimmy Fallon commercials for Capital One where he asks the question “Who doesn’t want more cash?” He’s got a point. Obviously, everyone wants the maximum amount of rewards they’re entitled to. Which is why it’s kind of strange that with several credit cards, you only get the maximum level of rewards if you “signup” or “enroll” for them each and every quarter.
In order to get the 5% with Discover More, Chase Freedom and Citi Dividend, you will need to remember to enroll your account for each calendar quarter (when the rewards rotate). If you don’t do that, then those categories won’t earn any more than normal.
Although I like all of the aforementioned cards and use them myself, because of this requirement, I generally don’t recommend them for people who have a tendency to forget or stay on top of things.
3. Reward limits
As you can probably guess, the vast majority of the cards that give 3-5% cash back come with a limit as to how much category spending will qualify. Some have rather high limits ($1,500 per quarter on Chase Freedom) while others have relatively low limits (the Discover More has quarterly limits as low as $300). Obviously you will want to pay attention to these.
But it’s not just the high cash back cards that come with limits, but also many other cards where you probably wouldn’t expect there to be a limit. For example, the cards from American Airlines will stop awarding you miles altogether if your yearly spending exceeds a certain amount ($60k for the Gold, $100k for the Platinum). Although these limits are relatively high and sufficient for most people, those who are avid business travelers or just big spenders may hit that cut-off point and not even realize it.
4. Retailers not being categorized as you would expect
If a credit card offers say, 3% on groceries, it’s important to understand exactly what that means – the store must be using a grocery store merchant code in order for you to get the 3%. That means places like Kroger and Food Town will probably count. However, if you buy groceries at say, a Walmart Supercenter, you aren’t going to get the 3% since that will be coded as a general merchant or discount store.
The lesson? If you shop somewhere on a regular basis and think that place is earning you higher rewards, make sure you double check your credit card statement. Not every store out there is categorized as one would expect. Not to mention, some mom and pop businesses intentionally miscategorize their industry in order to get lower fees for their credit card processing (because the type of business impacts the fee amount).
5. Diluted value during redemption
Last but certainly not least, you have to be careful when you redeem your rewards. Some programs, like Chase, have a very transparent 1 point = 1 cent conversion. However the World Points program through Bank of America can be deceptive, because on the lower redemption tiers your points are worth only half as much. To get the full penny per point, usually you will have to cash out 25,000+ in World Points at a given time.
So even if you do everything right earning your rewards, don’t mess it all up during the final lap when you are spending them. Make sure you run the numbers on the various redemption options so you know exactly what you’re getting.
This is a guest post written by Mike, the founder of Credit Card Forum.
Find out more about writing for YourMoneyDrawer.com.
