How signup offers work
Credit card signup bonuses come in a variety of flavors, including cash back, statement credits (which you can apply to almost any purchase on your card, depending upon the terms and conditions), and travel rewards. But regardless of the type of reward, all signup bonuses work in a similar fashion.
Here are a few signup bonus fundamentals you should consider as you choose the one that benefits you the most:
- Signup bonuses usually have a minimum spending requirement. The majority of credit card signup bonus offers require that you hit a minimum spending requirement within a fixed amount of time after opening the account (usually three months). For example, the Chase Sapphire Preferred® Card awards 50,000 bonus points to cardholders who spend at least $4,000 within the first three months.
- You may have to pay an annual fee. A really generous signup bonus is often indicative of an annual fee — the fee you have to pay each year to maintain your account. These fees range anywhere from around $50 to $450, but they are oftentimes waived for the first year. If you’re considering a card with a fee, make sure to evaluate how paying the annual fee could impact the benefit of your signup bonus.
- There may be additional terms and conditions. On top of the minimum spending requirement (and possible fee), you might have to perform other specific tasks to qualify for your signup bonus. For example, certain co-branded hotel loyalty credit cards might require that you sign up for the loyalty program before you can begin to earn your bonus.
Bigger isn’t always better when it comes to credit card signup bonuses. Before you commit to a lucrative offer, there are several dos and don’ts you should follow to avoid stifling your financial goals in the long run.
Do keep your overall credit health in mind.
Since opening new credit cards (and closing old ones) can have a negative effect on your credit, it’s important to weigh the pros and cons of either action. In other words, sign up for cards when it’s to your benefit, but stop once you’ve reached a point where your credit score might feel a negative impact.
Do pay your bill in full every month to avoid paying interest.
Paying interest on your purchases while simultaneously pursuing rewards is never a good idea. If you expect you’ll need to carry a balance, you should nix the idea of trying to earn a signup bonus altogether and opt for a low-interest credit card instead.
Do use your credit card as part of a comprehensive financial plan.
Without a plan, a new credit card could wreak havoc on your finances. Before you sign up for a new credit card, you should put a plan in place to make sure your new line of credit is working in your favor.
Don’t open too many cards just for the signup bonus.
As we’ve written before, getting a new card will result in a hard inquiry with at least one of the three credit reporting agencies. While one hard inquiry might have minimum impact on your credit score, having several could cause your score to tumble substantially. So while you may earn more rewards by signing up for a handful of offers at once, you could potentially hurt your credit.
For example, if you don’t normally spend $3,000 on regular bills and expenses during a three-month period, what makes you think you can do it safely to earn a signup bonus? If the minimum spending requirement on a card puts it out of your comfort zone, you’ll be better off if you opt out instead of signing up.
Don’t carry a balance or pay interest.
For some people, credit cards are a tool of mass destruction. And no matter how hard they try not to, they always manage to rack up a credit card balance that is bigger than they anticipated. If you’re one of those people – or if you just plan to carry a balance in general – you’ll be a lot better off if you steer clear of rewards cards and opt for a card with no annual fee or the lowest interest rate possible instead.
Don’t use rewards as an excuse to overspend.
If you’re someone who tends to get carried away with credit, it’s easy to see a shiny, new credit line as an excuse to overspend. You’re not doing yourself any favors if you go this route, however. By overspending to earn more rewards, you’re actually putting yourself in a worse financial position than where you started.
Don’t get stuck with minimum spending requirement you can’t handle.
When you’re comparing cards, forget about the dollar value of the signup bonus. First, focus on the spending requirement to find out which signup bonuses you could actually qualify for. There are a lot of tempting offers on the market, but it’s incredibly important that you don’t sign up for one with a minimum spending requirement that your wallet can’t sustain — or one that pressures you into overspending for the sake of the bonus.
Take the Citi Prestige® Card for example. It has a whopping 75,000-point signup bonus that’s worth over $900 — that’s almost $300 more than the Chase Sapphire Preferred® Card’s $625 signup offer. Here’s the kicker: The Citi Prestige® Card also has a massive $7,500 minimum spending requirement within the first three months of opening your account, which is over 50% higher than the Chase Sapphire Preferred® Card. Unless you can easily spend $2,500 a month on your card, you won’t qualify for the bonus.
Don’t forget about the annual fees.
Most cards with enormous signup bonuses offers also have equally enormous annual fees.
Let’s think about the Citi Prestige® Card again. It has a $450 annual fee, which is important for two reasons. First, unless you’re a prolific card user already, you might not have that much room in your budget. Secondly, once you’ve paid the fee out of pocket, the card’s generous $900 signup bonus is effectively worth $450.
Tips for maximizing your signup bonus experience
A little strategy goes a long way. Here are a few tips to make the most of your signup bonus.
Use the TSD Credit Card Tracker
If you have multiple cards, it can be difficult to organize your spending around multiple signup bonuses. That’s why we built the TSD Credit Card Tracker. This customizable spreadsheet will help you stay on top of information crucial to qualifying for each of your cards’ signup bonuses, like the bonus expiration date, the minimum spend requirement, and your bonus status.
You’ll also be able to log purchases associated with earning your signup bonus so you can evaluate how much you need to spend to qualify. (We recommend pasting in the totals from your statement at the end of each month.)
Focus on powerful card combos
Pairing two cards that share points allows you to essentially combine both signup bonuses. For example, if you plan to use your rewards for travel, this strategy could mean another night or two of vacation.
Consider the Chase Sapphire Preferred® Card and Chase Freedom®. The former offers a 50,000-point signup bonus (after you spend $4,000 on purchases in the first 3 months) worth $625 toward travel when redeemed through Chase Ultimate Rewards®. The latter offers $150 in cash back (after you spend $500 on purchases in your first 3 months). Since both cards earn Chase Ultimate Rewards points, you can pool your rewards together.
Maximizing your rewards with a signup bonus strategy
Credit cards with high-reward rotating categories often have earning caps. For example, the Chase Freedom® earns 5% cash back in bonus categories on up to $1,500 in combined purchases per quarter (when you activate it each quarter), and unlimited 1% cash back on everything else. To earn the $150 signup bonus, you’ll need to spend $500 on purchases in the first three months.
For example, let’s say you just received your brand-new Chase Freedom® and the current 5% category is Walmart. If you spend $1,500 at Walmart between now and Dec. 31, you’ll earn $75 in cash back, plus the $150 signup bonus. If you don’t shop at Walmart often, you can still spend $500 anywhere within three months to earn the signup bonus.
Don’t keep a balance
We recommend keeping your credit utilization — the percentage of your credit limit that’s currently in use — under 30% to avoid damaging your credit score. Still, you don’t need to carry a balance to show responsible use of credit. Keeping your utilization ratio as low as possible is a great way to keep your credit healthy. Paying your balance in full every month also prevents you from incurring interest, which can seriously damage your financial future if you don’t pay it off.
When can I apply for another credit card?
Six months is a rule of thumb, but if you have excellent credit and a history of making payments on time, there’s a chance you could be approved in as little as two to three months. If you have a FICO® score of 669 or less, you should probably wait at least a year. The only time you should risk incurring a hard inquiry is when you have a high probability of being approved.
Here’s how credit inquiries work
Hard inquiries appear on your credit report when lenders check your credit report after you have applied for credit, like an auto loan or credit card. Not only do they affect your credit score; they live on your credit report for up to two years.
The level of impact depends upon a variety of factors — length of credit history, number of accounts, and the time since your last hard inquiry, to name a few. If you have a solid credit history, you might not be affected by hard inquiries that much. Others could lose five or more points by merely receiving two hard inquiries in the same month.
Applying for lots of credit is usually a sign of financial instability, so the more accounts you open in a short period of time, the more of a risk you become for lenders. FICO® says that applicants with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy. Here’s the bottom line: Keep track of your hard inquiries and try not to have more than four on your credit report at any given time.
Credit cards can be a valuable tool if used wisely, and signup bonus offers can be extremely lucrative if pursued with a thoughtful strategy in mind. However, it’s important to fully understand how these offers work if you truly want to maximize them.
The most important thing to remember is to use credit cards to your advantage, but don’t let them use you. If you find yourself spending more just to get a bonus, or worse, getting into debt, you’ll probably be better off avoiding credit cards and signup bonus offers altogether.