The pitfalls of staggered cashback/reward rates

[wollepopolle]

Staggered cashback rates are a trap. Think of it: Up to 5% on gas and groceries with the Amex Blue Cash. Up to 1.25% on everything else.Here is the trick, though: Once you've reached the spending limit to be catapulted into the higher cashback categories, you are only earning a measly 0.5% on everything except for gas and groceries. For the average spender, gas and groceries only comprise about 16% of all expenses according to Amex's own scheme.

5% sounds pretty awesome. It's supposed to elicit your greed.I did some calculations and the result is that, e.g. with my BoA VISA (2% on everything) I fare much better. In order for cards like Amex Blue Cash to trump other cashback cards you need to a.) spend a lot annually  and b.) spend more on gas and groceries than other people.

However, chances are that if you spend a lot each year (lets say, $20.000 plus) it just cannot be on gas and groceries. Nobody can eat that much or can guzzle that much gas (unless you have a Hummer maybe and commute 200 miles every day to and from work).

So, my verdict is that my simple 2% card from BoA is much better than the Blue Cash even though it cannot claim to fetch 5% anywhere.

These cards with staggered cashback rewards are configured like that on purpose: to spur the greed and make people believe they can earn more cashback.

However, if you do the math, you'll quickly see that it makes no sense. I am not saying that cards like Amex (or Discover for that matter) are bad cards. However, they fool the customer with an artificially high number that gives the wrong impression.

[haulingthescoreup]

The other thing that it's easy to miss with Blue Cash is that even when you hit the higher rebates, you have to average those returns in with the piddly rates you were getting earlier to figure out what you actually got throughout the year. So your effective annual rate is always lower than the 5%, etc.

And then, after a year, you start all over again.

If it's the only card you use, and you charge everything you buy on it, it can work for you. But otherwise, I'm with wollepopolle, it's overrated.

[Travis-84]

Lets not forget that there are cards that do offer 5% right off the bat for gas  (BP and Penfed).  The BP card you can only use at BP to get 5%, so that may or may not be a problem.  With reward cards, I figure its best to have 2 or more, and use the one that is best for where you go.

I'm going to apply for the BP card in a month or so.  I drive a truck at work, and usually I have my bosses credit card, but sometimes I put the gas on my card, and he pays me back.  I would love to get 5% cash back.  In fact if I did, I would stop using his credit card.  When a tank of gas can run 120.00, 5% adds up quick.

[Anonymous]

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@haulingthescoreup wrote:

If it's the only card you use, and you charge everything you buy on it, it can work for you. But otherwise, I'm with wollepopolle, it's overrated.

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+1

It's a card for big spenders, and even then you probably have better options.

[Anonymous]

I've always thought the Amex Blue card was not great. Between PenFed, Amex Costco and Discover More I'm going to finish the year around $1400 in cash back (note I use one of these cards as a business card and put at least $10k per month on it PIF). That would be tough to do with Amex Blue.