Calling BS on 5% Rewards Advertising

By Tim Chen. Last updated 25 September 2014. 9 comments

If you find yourself looking for a credit card online, or even just perusing a few of your favorite personal finance sites, you'll come across a lot of credit card advertising. Credit cards are big biz, so it stands to reason that issuers will spend like crazy to convince you that their card is the one you should be swiping.

However, if you dig a bit deeper into these cards, you'll soon realize that what you see is not always what you get. The glitzy advertisements aren't always backed up by the fine print. And the biggest offenders are those companies that advertise "5% Cash Back" rewards.

Nobody can afford to pay you 5% cash back on everything

Interchange fees (or "swipe fees") in the U.S. are generally around 2-2.5%, so credit card companies would actually lose money on every transaction if they paid out more than 2-2.5% to you in the form of rewards. In other words, unless you're paying an ungodly annual fee, it stands to reason that you should investigate further before considering a credit card that advertises 5%.

Two card issuers in particular, Discover and Chase, make it nearly impossible to decipher their rewards programs during the application process. Instead, they fill their pages with giant dancing "5"s and "Apply Now" buttons and relegate their terms to obscurity. Let's explore these two ad campaigns to see how their marketing teams earn their keep.

It pays to Discover...that your rewards aren't what you think

Let's say you see an ad like this, where Discover offers 5% cash rewards on the More and Clear cards. You get excited and click. On the next page, you see the qualifier that you earn 5% back on "popular category purchases," while the rest of the time you earn "up to 1% cash back." Not quite what you expected, but not too shabby either. So let's just try to figure out what categories they are talking about.

If you take the time to click on "Rates & Disclosures," find the smallest font on the page, and scroll all the way to the end, you might find the link to the current 5% cash back schedule. It says that for the upcoming month of June, cardholders can earn 5% back on up to $200 at restaurants. Just restaurants. Just $200. And you have to sign up to take advantage of it. Yes, you read right, they not only limit your 5% rewards, but you have to opt in to receive them. This is not automatic payback, you have to work for it!

Inconvenience aside, let's put some numbers on this. If you spend $2,000 in the month of June and $200 of that goes to restaurants, you'll end up with (5% x $200) + (1% x $1,800) = $28, or 1.4% cash back. And don't forget that you're really only earning "up to 1%", so it could end up being less. I don't know about you, but I didn't see that anywhere in the ad.

Chase Freedom: Get 5% rewards while saying NO to interest? Um, NO

Chase and Discover must use the same ad agency, because at first glance they'll look exactly the same, only blue instead of orange. Giant number five? Check. Vague mention of "popular categories"? Check. But once you get past the pretty pictures and actually try to figure out how this card works, Chase really falls flat on their face.

What type of credit card are you interested in?
How much do you spend per month?
Do you carry a balance?

Just how hard is it to decipher the meaning of 5% rewards on Well there is actually nothing on the site to explain it. Discover thinks they did a good job of hiding the link in their terms and conditions, but Chase really took it a step further by making you resort to Google to figure out what the popular categories are.

Like the Discover More, the Chase Freedom relies on an "opt in" model for rotating categories of spending. But Chase has a predetermined quarterly schedule rather than an arbitrary month-over-month calendar of rewards. So if you can find the schedule anywhere, it shouldn't change any time soon. Thankfully, the NY Times tracked it down for us not too long ago.

From April to June the rewards category included "home improvement, lawn and garden, home furnishings and drugstore purchases." But what if you're a city dweller with no need for a Home Depot? No luck. Well for the months of July through September, you can earn 5% back on "airlines, hotels, car rentals, and gas." Oh wait, did you book your family's summer vacation before the kids got out of school? Oops.

As a holder of this card, I have a personal vendetta. In the past two years, the rewards program has changed on me three different times. Add to that the rotating reward categories that I actually have to go out of my way to claim, and I'm really peeved. After all, when I signed up for this card I was promised 3% back in my top three spending categories, and it was paid to me automatically.

So should you steer clear from every card that advertises 5% back?

No, not necessarily. Remember that there's nothing inherently wrong with these credit cards, just the way they are advertised. Armed with the right information, they can be great tools for getting what you want. If you don't mind the inconvenience of signing up for a rewards program each quarter, and you spend a lot of money in those particular categories, they might be the best for you.

Now if that's too much of a pain for you (as it was for me), there are plenty of cards out there that actually work as advertised. For example, many gas cards pay 5% back on gasoline purchases without any squirrely gimmicks. And there are also cards that pay up to 2% back on everything you buy, which could mean more money in your pocket than just earning 5% on a relatively small portion of your spending.

In either case, it's up to you to read the fine print, crunch the numbers, and figure out what you need to do to make your credit card company pay you.

Tim Chen of NerdWallet was formerly a hedge fund analyst specializing in credit card networks and technology companies, before becoming a victim of the financial meltdown. NerdWallet is the Kayak for credit card search, and seeks to become the number one source for unbiased online credit card information. Here are more resources from NerdWallet:

Editorial Note: 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 any card issuer.

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Guest's picture

Very useful insight into this. I came across your post via Twitter. We need more articles like yours to protect consumers better. Thank you!

Guest's picture

Something also to take note of (at least for the Chase Freedom card) is that there is a limit to how much you can get 5% on. You only get 5% back on the first $800 you spend on the special categories each billing period. So if you spend $1000 on a new washer and dryer at Home Depot this month, you'll only get 5% on the first $800 and 1% on the remainder.

Guest's picture

That limit is a deal killer for me.
There's a hoop factor, I'll only jump through so many. Sign up every 3 months. Ok.
But I want to be able to maximize the savings, not have to track every dollar at Home Depot to be sure I'm not getting just 1%. My current card offers 2% on everything, no tricks, no hoops at all.
So, $2000 at HD in the right period gets me (on Chase) $52, right? But $40 on mine. I'm in the midst of projects that will have me spending a few thousand at Home Depot. I'll spend my time plastering, not Chasing a bad deal.

Guest's picture

I have a Household bank visa that gives me a straight 2% back on all purchases up to $400/year (so on the first 20K of rewards). It also has a $39 annual fee. I have yet to not max this out so I'm netting $361/year in free cash. I could probably do slightly better by using other cards and chasing catagories...but it's just not worth it. I use this card and only this card most of the year (I don't charge much more than 20K/year on cards).

Guest's picture

I signed up for chase when it was 3% on top 3 categories too. They have made the rewards too hard to get. Now I am a fan of Schwab Visa card that puts 2% flat, no ceiling rewards that gets deposited automatically into my brokerage. No gimmicks to play. No annual fees as well.

Guest's picture

Tim, this was very insightful! What struck me as particularly interesting was the fact that the Discover card is opt-in rather than opt-out. This definitely is a psychological trick that Discover is playing on its customers. This is very similar to things like gym memberships that will continue to charge you until you cancel. These companies are relying on the fact that we will either be too lazy or unaware that we need to act. The worst part about it is that it's often true! Since it doesn't seem like the there's a way to automatically opt-in, (which would be the best way) the next best thing is to create a system that will help you remember, like a calendar. Great post Tim!

Guest's picture

I've had my Discovercard for several years. I use it for almost everything (groceries, gas, utility payments...) and I pay off the balance every month. Every quarter, I sign up for the 5% deal (it changes every quarter). The rest of the time, I get 1% back. At the end of the year, I look at my year-end statement online. Each year, I earn from $250-$500 in cash back, which I usually apply to my balance. A few times, I've used my CashBack balance to buy jewelry at Ultradiamonds, and get 2 times my CashBack amount. (e.g., I had $40 in cash back which equaled $80 for a very nice pair of ear rings!) How much cash back did you get on your credit card or debit card or cash expenditures? Even if it's "only" $200, it's $200 more than I'd have had otherwise. Of course, this ONLY works if you pay off the balance every month. If you carry a balance and pay only the minimum, then you need to cut up your cards immediately. If you only charge a few hundred dollars each month, 1% isn't much. But if you STOP using your debit card/cash and ONLY use the checking account to pay off your Discovercard each month, you are cash ahead. e.g., if you spend $3000 per month for gas, groceries, utilities, lunch, whatever, 1% of that is $30 more than what you'd have had if you'd paid cash! (Self control is very important, of course.)

Guest's picture

Great article! It's smart to look at the real deal and not to be fooled by slick advertising. Bonus offers are great, but don't forget to look for the best base rate and to factor in any annual fees you might pay before signing up. Also know that branch banks can't afford to give the best deals since US banks spend $80 billion every single year just building and maintaining their branches. Check out online banks as they can afford to give you the most in value.

Guest's picture

I use Discover only for the 5% purchases. You only have to sign up one time per quarter, use the Discover on the special categories, only if you need them, and collect your cash. Occasionally, I buy something that is not in the category, thinking it is, or just forget and buy something in the category on another card which pays 2% back. No big deal. Over a few years, I've got a few hundred dollars, so good deal for me.

I wonder how Discover makes money doing this. Perhaps they are banking on us using the card for everything? Or they have deals going with these categories of merchants?