4 x $1,500 Is Not $6,000: Annual vs. Quarterly Limits for Credit Card Rewards

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.

» MORE: Which 5% rotating bonus category card should you choose?

Crunching the numbers

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.

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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.

The value of flexibility

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.