The Credit Card Sign Up Bonus: Too Good to Be True?

You may have seen ads or received notices from credit card companies offering you hundreds of dollars as a credit card sign up bonus for opening a new account with them. Taking advantage of one of these offers seems like it could mean “free” money for you, but is that really what will happen when you open a new credit card account with them? Even after the bonus, could your card just lead to debt that costs you more in the long term?

Before signing up for a new credit card with an attractive sign-up bonus, here’s what you should consider and how to make sure you’re really getting a good deal.

How a credit card sign up bonus works

Most credit card sign up or welcome bonus agreements require you to earn the bonus by spending a certain amount of money on the card within a specific period of time. For example, you might have to charge $500 on the card within the first 3 months of opening it in order to earn a $200 cash-back bonus, or spend $4,000 to earn 80,000 points.

It’s important to understand the details of what you have to do to earn the bonus so that you can determine:

1. If you can earn the bonus without having to spend unnecessarily.

2. If the benefits of the bonus outweigh the cost to acquire it.

The key to taking advantage of these offers is to figure out how you can get the sign up bonus with the spending you’re already doing. In other words, if you have to buy things you wouldn’t normally buy in order to qualify for the bonus, then you may actually lose money on the deal.

Let’s look more closely at the information you need to gather and how to evaluate it so that you can make a decision that puts you in a strong financial position.

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What to look for in a credit card welcome bonus

When comparing credit card bonuses, look for this info:

• Spending requirement to earn the bonus

• Amount of time you have to spend the required amount

• How the bonus is awarded—as cash back, a statement credit, points, etc.

• How and when the reward points can be redeemed, and what you can spend them on

• Expiration date of the bonus, if any

• Annual fee of the credit card

• Interest rate of the credit card

Now, here’s how to use that information to help you decide if opening a new credit card for the sign-up bonus will save you money, or cost you money by increasing your total debt. Start by asking yourself these questions.

1. Do you really need a new credit card?

This first question to ask yourself is, “Should I open a new credit card at all?” If the welcome bonus is the only reason you’re opening a credit card, tread carefully, especially if you already have balances on other cards or are going to be applying for other types of credit. Consider questions such as:

• Will this new card replace a different card?

• Will having more credit tempt you to overspend?

• Will applying for this card lower your credit score at a time when you need to apply for a loan?

2. Can you easily meet the spending requirements?

Remember, if you don’t spend the required amount within the specified time, then you won’t get the credit card sign up bonus. Some bonuses have high spending requirements, such as $20,000 in 12 months or $4,000 in 3 months. Whether or not you can spend that much depends on how much you typically charge to your credit cards each month.

What you want to avoid is getting a new credit card for the sign up bonus and then spending more than you normally would just to meet the bonus requirements. If you have to spend money to make money in this scenario, that’s a red flag.

It’s important to be accurate and honest about your spending patterns in order to avoid losing money on a welcome offer. To find out how much you typically spend on your credit cards each month, look at your current credit card statements and find the line (usually in the top right corner) that says “new charges.” That tells you how much you spent during one month on that credit card. Look at that number for the past several months to see what the average amount is. If you use multiple credit cards on a regular basis and plan to move all your spending to the new card, repeat this process for each card and add up the new charges across all accounts to get your total typical monthly spend.

If you can easily meet the spending requirement with what you typically charge to your cards for routine expenses (which you pay off each month), then you might be able to make some money for the purchases you’d make anyway.

3. Will you take full advantage of the rewards?

Consider what type of bonus reward the card has, as well as the ongoing rewards for purchases, and confirm that they truly are valuable enough to you to go to the effort of getting a new card.

• Do you prefer a cash-back reward with a lot of flexibility?

• Do you want a statement credit to offset your purchases?

• If points are awarded, what kind are they and how can they be used? (Airline miles, online shopping, gift certificates, etc.)

• Are you likely to use the reward before it expires?

4. Is it still a good deal if you have to pay an annual fee?

Many credit cards have an annual fee, which can be close to a hundred dollars or more. Check to see if the card you’re considering has an annual fee, and subtract that from the value of the credit card sign up bonus. Also consider if you’re going to keep the card open after the first year and what the future cost of the annual fee will be.

5. Will the interest rate save you money?

Another thing to think about is if the interest rate of the new card is higher or lower than your current credit cards. If you’re paying off your balances on your credit cards every month, then you don’t need to worry about interest rate as much. But if you carry a balance, then it’s important to calculate how much you would save or lose by switching to the new card. If you find that the reward money is used up by higher interest costs, then it will likely add to overall debt.

If the new card has an introductory interest rate that is lower than the normal rate, then do some quick math to see if you can pay off the entire balance before the introductory rate expires. For example, if you need to charge $4,000 to earn the bonus and the card has a 0% interest rate for the first 6 months, then you’d need to make monthly payments of $667 to pay off the $4,000 before the promo rate expires; otherwise, you’ll end up paying interest.

One thing to keep in mind is that a credit card bonus doesn’t usually count a balance transfer as part of the spending requirement. In other words, only new spending will help you earn the bonus. So if you have existing credit card debt that you want to pay off, a balance transfer credit card might actually be what you need.

6. Will you come out ahead?

Once you’ve thought about all the ways you can both make money and lose money by applying for a credit card sign up bonus, you’ll have a better idea of whether or not it’s a good idea for your situation. In general, it’s good to be cautious about taking on new credit of any type, because it can be a lot easier to get in than it is to get out. They key is to manage your credit card debt so that it doesn’t overwhelm your finances.

If you’ve already taken advantage of one too many sign up bonuses…

If your credit card debt has already started to balloon out of control, then the most important next step is understanding your options for getting it paid off so you’re not stuck in an endless cycle of paying off debt. Download our free How to Manage Debt Guide now to learn about the six options you have for getting debt under control.