How do credit card bonus categories work?

At a glance#

What a category really is#

A bonus category sounds like a kind of spending and is in fact a list of merchant codes. The name is shorthand; the list is the content.

Whether a payment belongs to it is decided by the merchant’s code. What you bought plays no part, and that is where most disappointments come from. A purchase can fit the category perfectly while its settlement does not, and the statement then shows the base rate for what looked like a textbook case. How such a code arises and who assigns it is described in the merchant code decides. Before buying, look at the merchant, not the goods.

The multiplier gets the advertising, but the return is the multiplier times your own spending in that category. Spend little there and a high multiplier delivers almost nothing; spend a lot and the cap arrives quickly. Between those two points lies the range in which a category pays, and it is narrower than the advertising suggests. A card taken out for a single category therefore only makes sense once your own spending there is large enough for the gap between base rate and bonus rate to add up.

One payment earns in one category, the one attached to the merchant code. Combining categories therefore means choosing the card per payment; a single payment cannot be split across two.

The three components#

Every category is defined by the list of codes, the cap and the period. All three sit in the terms, and all three decide the return.

The list of codes#

Every category consists of a list of eligible codes and frequently a second list of explicit exclusions. Both sit in the terms, never in the advertising, and reading them once means knowing them for years.

The lists differ even between two cards from the same issuer, so a category with the same name can be drawn more or less widely on two products. The exclusions are the more revealing list. They name the cases where the category name creates an expectation the statement does not meet.

The cap#

Most categories carry a cap, expressed as an amount per quarter or per year. Above it the base rate applies again. A quarterly cap resets four times a year, so spending that bunches in one quarter loses more to it than the annual total suggests.

For judging a card the cap matters more than the headline rate, because a high rate with a low cap delivers less than a middling rate without one. Knowing your own spending, the cap can be worked out once, and after that it is clear whether the category covers your needs at all.

Some categories add a minimum spend. The higher rate then applies only above a certain sum, and below it the base rate stands.

The period#

Fixed categories apply permanently and need no attention once the assignment stands, which is most of their appeal. Rotating ones change at fixed intervals and almost always add an activation step. Without activation the spending earns the base rate, and activating afterwards generally does not apply retroactively. A reminder each quarter takes two minutes; without it the category is worthless.

Several cards mean checking the caps together. Two cards with the same category and separate caps double the favoured amount.

The base rate deserves as much attention as the category. It applies to everything outside the category, which in most households is the larger share of spending.

Worked example: two cards, the same spending#

Somebody spends regularly in one category. One card pays a lot with a cap, the other less without one.

Up to the cap the capped card leads on every payment. Once the cap is reached, each further payment earns only the base rate there while the uncapped card keeps earning its middling rate, and at some point in the year the uncapped card catches up and overtakes. Where that point lies depends on nothing but the volume.

Card comparisons go wrong here more often than anywhere else. The advertised number applies only up to the cap, and above it the base rate decides, so at high volume the smaller number without a cap comes out ahead. No advertisement says so.

The cap also has a hidden price. It requires monitoring, and monitoring is effort that appears in no advertisement either.

Your own statement answers the volume question, and three months are enough to estimate the annual spending per category. Take a card with a high grocery rate and a quarterly cap: it covers the whole shop for a single-person household and only part of it for a family. For the family the card with the lower but uncapped rate is the better one, and the same card is good to a different degree for two households.

Rotating categories add the activation window. It usually opens a few weeks before the quarter and closes at quarter end, and outside it nothing can be done.

Collecting points instead of cashback brings the value per point into the sum. A higher rate in a weak currency can be worth less than a lower rate in a strong one, as what points are worth shows.

What regularly does not count#

Three groups of payments fall outside almost everywhere.

Cash and cash equivalents. Withdrawals, transfers and buying payment instruments do not count regardless of the merchant.

Fees. Annual fees, interest and the bank’s own charges are excluded.

Payments through intermediaries. They carry the intermediary’s code, and that usually sits outside the category, so buying direct is the only reliable way into it.

Refunds cut the other way. Returning a purchase claws back the earning proportionally, even where it had long been visible in the account.

Foreign payments earn the category rate as well, but the foreign transaction fee comes on top and can consume the advantage.

When it is not worth optimising categories#

The effort is not worth making in these situations:

• With small spending in the category. The difference is then smaller than the attention it costs.
• With rotating categories and no activation. Without a reminder the category goes unused.
• When it means paying more. A higher price beats any category.
• When several cards have to be managed. Above a certain number the administration costs more than the return.
• When the card comes before the spending. Choosing the card first and then looking for things to buy inverts the logic and turns an earning rate into a reason to spend.

The statement shows which category each payment landed in. That is the first place to look after a large purchase, and it decides whether a claim makes sense at all. A small test payment shows whether a merchant lands in the expected category before the large one goes through. If points still go missing, the route for a claim is in what to do when points are missing.

How to use categories sensibly#

Half an hour, once, is enough.

First write down your own large spending blocks. There are usually three to five, and they make up most of the annual volume. Last year’s statements are the source: sorted by merchant, they show the blocks within minutes.

Then check which card offers the best rate for each block, cap included, and note the assignment so no thinking is needed at the till. One line per block will do. Some people keep it on a card-sized note in the wallet; others put one card in the car for fuel and one in the wallet for groceries. After a few weeks the habit replaces the note.

Subscriptions are the easiest win. They run monthly under the same code, and a single assignment works for years.

Cards with a selectable category let the holder decide which block is favoured, and that choice deserves a yearly review. Cards tied to one named merchant are narrow but unambiguous, because the merchant is named in the terms and no code needs checking. Mobile payments pass the merchant’s code through, so the category applies whether you paid by card or by phone.

Shopping portals sit on a separate layer. A portal payout comes on top of the category and is independent of it, as how do shopping portals work describes.

Couples collecting together split the blocks, and each pays with the card that offers the better rate for theirs. Two cards usually suffice, one for the largest blocks and one for everything else, and that pair collects the overwhelming share of the available return. Fine-tuning beyond it pays only for households with very high spending, and the return on the last category is almost always smaller than the effort of maintaining it.

What rotating categories demand#

Rotating categories are the most demanding part of this topic. They require activation, monitoring and planning.

Their advantage is the level: for individual quarters the rates are far above those of fixed categories. Their disadvantage is unpredictability. Without matching spending in the right quarter the holder gets nothing, and the cap lapses. Planning means moving larger purchases into the quarter whose category fits them, which works for things that can wait and fails for everything that cannot.

For most households rotating categories are a supplement to fixed categories that match recurring spending. A workable mix keeps fixed categories for everyday spending, rotating ones for larger individual purchases, and everything else on the card with the best base rate.

For travellers, fixed categories for travel and dining are the most useful. They catch spending that happens anyway, and they are rarely time-limited.

The most common mistakes#

• Buying by the category name. The merchant code decides, and the name only hints at it.
• Overlooking the cap. A rate without its cap is half a number and belongs in no comparison.
• Forgetting the activation. A quarterly reminder costs two minutes; a missed one costs the quarter.
• Buying through intermediaries. Their code replaces the merchant’s, so buy direct when the category should count.
• Creating spending for the earning. The card follows the spending, never the other way round.
• Managing too many cards. Three to five blocks covered is the sensible place to stop.

Related topics#

• The merchant code decides
• What to do when points are missing
• How do shopping portals work
• What points are actually worth
• How do I calculate an annual fee?
• What a welcome bonus is worth