Would using a credit card that earns 5% cash back on gas earn more money back than a credit card that earns 1% cash back on every single purchase?
Reader Diane and I have been chewing on this question in the comments section of my post on a reader’s credit card bill. I decided to do the math and figure it out once and for all.
Is a 5% cash back credit card worth it?
I’m going to use my own spending numbers to do the math. In the past three months, Hubs and I spent $972.74 on gasoline. That’s an average of $324.25 a month. Our gas tab climbed permanently in October when Hubs started a new job that doubled his drive to work.
How much would a 5% gas credit card have earned us?
$972.74 x .05 = $48.637.
Just under $50 in cash back. That’s not bad. But the 5% gas reward isn’t year round. On Diane’s Chase card, the 5% gas reward is valid for 6 months of the year. During the other months the 5% discount is for drugstores, Starbucks, Amazon, or restaurants. (There are at least three rewards categories each quarter on Diane’s card.) The rewards categories change every quarter and you have to opt into them online (you can set up an email reminder).
Yep, that’s right. The categories change AND you have to opt in to earn the 5% reward. Diane keeps a sticky in her wallet as a reminder of which credit card is earning what percent back on each category.
Yeesh! Sounds like a lot to remember, right? Maybe. But I would commit to spending 15 minutes each quarter to tracking the categories (and get a new credit card) if it meant earning more cash back. On our current credit cards (we have two) we earn 1% on EVERY SINGLE PURCHASE. Does a 5% gas card out earn a 1% on everything card?
How much did our 1% cash back card earn us?
In the same three month period, we earned $90.234 from our two 1% cash back credit cards. That’s nearly double the gas rewards cash back. So the 1% card easily wins out, right?
Not so quick. The 5% rewards card earns 1% back on ALL OTHER PURCHASES. So the rewards stack up faster.
So what’s the catch with the 5% card?
Get this. You can’t earn more than $75 per quarter in rewards, no matter what the categories are and no matter if your rewards are stacking up at 5% or 1%.
This one limitation makes a 5% card a bad deal if Hubs and I put more than $3,500 on our credit card OVER THREE MONTHS. Here’s why.
We spend roughly $1,000 every three months (one quarter) on gas. At 5% back, that adds up to $50 cash back. In that same quarter, we’d earn 1% back on the rest of our purchases. But we only have $25 left to earn because of the $75 per quarter rewards limit.
At 1% back, we’d only have to spend $2,500 over three months to earn $25 in cash back, maxing out our $75 reward.
Hubs and I recently agreed to limit our monthly credit card spending to $2,000, and while we have been successful so far, it’s been tight. Which means that every month quarter we’d hit the $75 rewards limit, losing out on additional rewards that we could earn with a no-limit 1% cash back card.
So why do so many people sign up for a 5% gas credit card?
The allure of 5% cash back on gas is huge. Where else can you get such a huge discount on gas? (Ahem, by earning gas points through grocery stores, that’s how). Still, the card offers 1% back on all other purchases. I wonder how many people read the fine print and find out about the $75 rewards limit?
Because of this limit, I’m against 5% cash back cards.
I’m also annoyed that the 5% reward jumps from one spending category to the next. It’s a game that credit card companies play with us consumers that makes the cash back earnings seem greater than they truly are because a good number of folks are bound to forget to opt in every quarter.
There are two exceptions to my stance.
1. If you spend much less on your credit card than I do, and rarely max out the $75 quarterly reward.
2. If you have a second rewards credit card that you can use when you max out your $75 reward. So you’d keep earning rewards, just on a different card.
Note: Years ago I had a credit card that gave me 5% cash back on gas with NO LIMIT! Guess what happened? The bank canceled the card. I’m guessing they were losing money because it was a no-brainer way to make money back. I’ve never seen a card with this same benefit since!