One of the best ways to improve your finances is to add in the use of rewards credit cards. The right rewards credit cards can help you earn free travel and even cash back. As long as you are careful to incorporate your credit card use into your regular spending, and as long as you pay off your balance, you can do a lot of good for your finances.
The financial industry, including credit cards, is always looking for the next big thing that will encourage consumers to use certain products. In recent years, one of the biggest trends in credit card rewards has been the rotating category cards. These credit cards feature programs that pay 5% cash back — as long as you spend in certain categories at certain times of the year.
While these programs can certainly help you boost your cash back rewards, they aren’t perfect. And there are some drawbacks to rotating category cards.
How Rotating Category Rewards Cards Work
Most rotating category credit cards follow the same basic pattern. Every quarter, there is a new set of categories that earn 5% cash back. Everything not in the 5% cash back categories earns a lower amount, usually 1%.
During one quarter, you might be able to earn 5% cash back on gas and toys. The next quarter, gas and toys will be earning you 1% cash back, but your spending on groceries and travel will now give you the higher rewards.
It’s important to understand that most cards don’t just automatically give you the 5% cash back once the new quarter arrives. Instead, you have to sign up for the extra rewards. Unless you remember to log on and sign up each quarter, you can miss out on the extra rewards.
Drawbacks to Rotating Category Rewards Programs
The biggest drawback to rotating category rewards is that you have to remember to sign up. You can miss out on a number of rewards if you forget to sign up until halfway through the quarter. On top of that, some credit card issuers have deadlines for signing up. If you don’t sign up in time, you miss even the last few weeks of the quarter.
Some credit card issuers send you an alert each quarter to remind you to sign up. Make sure that you take the time to do so, or you might miss out. It doesn’t do you any good to have a rotating category card if you never get the 5% cash back.
Another drawback is that the categories for the quarter might not be things you plan to spend on. So, the rewards are basically useless. Some consumers decide to make purchases based on the rewards. However, this can lead to waste, since you are now making purchases you hadn’t planned on making. If you end up carrying a balance because of this process, you could easily end up paying more in interest than you earn in cash back rewards.
Any time you spend money you hadn’t planned to, you are not saving. You should never spend money on something just for the credit card rewards. For your credit rewards programs to be effective, you have to use them within the confines of your budget.
And, of course, the fact that you only earn a very small amount on all your other purchases can be irksome, since you aren’t getting benefit out of the rotating category system, unless you just happen to be spending on those categories in the right quarter. Often this means looking at planned categories at the beginning of the year and planning your spending according to the stated schedule.
Using Other Credit Card Rewards Programs
There are some credit card rewards programs that are introducing new rewards opportunities. The Barclays Rewards MasterCard offers 2% cash back on groceries, gas, and utilities, all year long. No signing up for categories, and these are the rates permanently for the categories most consumers use regularly.
American Express offers its Blue Cash cards, including a Preferred version (with an annual fee) that offers tiered categories that can beat those offered by rotating category cards. Even Capital One offers the Quicksilver card, featuring 1.5% cash back on all purchases.
It’s possible that, when you average out your actual spending and cash back over the year, that you could benefit from a card that doesn’t require you to sign up each quarter. Many cash back cards end up with an effective average of 2% cash back for the year. If you want to boost your own rewards, you can try looking ahead to see what categories will be featured each quarter. That way, you can plan major purchases in certain categories to match.
It’s also possible to create a plan so that you do your spending on non-category items with cards that have rewards year-round. If you have a 2% “traditional” cash back card in addition to your 5% rotating card, you can make the most of the situation. Carefully spend on cash back categories during the appropriate quarter while you use your regular card, with the higher year-round rewards, for everything else.
This strategy adds another layer to your planning, but it can help you maximize your credit card rewards — as long as your spending is planned.
Consider the possibilities for your card, and then work out a plan that works best for you. You might be surprised at how effective your cash back rewards credit card can be.