Credit cards that offer bonus rewards in certain categories often limit the amount of spending eligible for their highest reward rates. Sometimes these limits are imposed on an annual basis; other times, the limits apply quarterly — that is, to three-month periods of the year. All other things being equal, annual limits are better.
“Bonus rewards” refers to any rewards that a credit card pays out in excess of its usual rate. For example, if a card gives you 1 point per dollar spent on most purchases but 2 points per dollar spent on dining, then dining is a bonus category for that card. Credit cards usually provide rewards in the form of points, miles or cash back.
Say you’re considering a card that offers 3% cash back at grocery stores on up to $6,000 a year in spending. Another card offers the same 3% rewards rate at grocery stores, except that the bonus is available on up to $1,500 per quarter in spending. On both cards, any spending above those caps earns 1% cash back.
At first glance, it seems like a wash: A $1,500 limit per quarter, multiplied by four quarters per year, comes out to a $6,000 annual limit. No difference, right? But that presumes your spending is spread evenly over the course of the year. That’s not the case for everyone.
» MORE: Best credit cards for grocery store spending
Suppose that by the end of March — that is, the end of the first quarter — you’ve spent $1,400 on groceries:
- If you have an annual cap of $6,000 in bonus spending, then you can still earn 3% on $4,600 worth of groceries before the end of the year.
- If you have a quarterly $1,500 cap, however, you can earn 3% on only $4,500 worth of groceries over the rest of the year — $1,500 in each of the three remaining quarters. You don’t get to roll your unspent $100 into the next quarter and earn bonus rewards on it there. That opportunity is gone.
Quarterly limits ding you when you “overspend,” too. Say you spend $1,000 on groceries in a normal quarter — roughly in line with average household spending, according to the most recent annual data available from the Bureau of Labor Statistics. What happens if that jumps to $2,000 in the fourth quarter, as relatives descend on your house for a series of holiday feasts?
- If you have the $6,000 annual cap, your grocery rewards for the year are $150.
- With $1,500 quarterly caps, your grocery rewards for the year are $140.
The difference here isn’t giant, but it points to the single biggest advantage of annual limits over quarterly limits: flexibility. In general, the more flexible your credit card rewards, the more valuable they are. With the annual limit, you could shell out a steady $500 on groceries every month or blow the whole $6,000 on a single banquet on the Fourth of July, and in either case you’d earn $180 in grocery rewards. With the quarterly caps, you’d get $180 in the first situation but just $90 in the second.
Unlimited bonus rewards are the ideal, of course. But if you must accept a spending limit on bonus rewards, an annual limit gives you more flexibility, which can translate into more rewards.
» MORE: NerdWallet’s best rewards credit cards
Paul Soucy is an editor at NerdWallet, a personal finance website. Email: paul@nerdwallet.com. Twitter: @paulsoucy.
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