Calling BS on 5% Rewards Advertising
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.
Just how hard is it to decipher the meaning of 5% rewards on get.yourchasefreedom.com? 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.