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 two rules you should follow to avoid stifling your financial goals in the long run.
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
($3,500). 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.
A few more tips
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.
Do pursue signup bonuses with a strategy in mind.
A hefty signup bonus won’t do you much good if you don’t know how to use it. Before you pick one bonus over another, make sure to explore each loyalty program so you know what your points will be worth. These posts can help:
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
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.
The best way to avoid losing control of your credit card spending is to live by a budget. Don’t spend more money than you have, else you risk maintaining a balance and incurring interest payments. Here’s another plus: Evaluating your budget is a great way to hone in on previous spending habits and determine which signup bonuses you could actually qualify for. Take a look at our guide
to choosing the right type of budgeting system for your lifestyle and income for more information.
The bottom line
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.