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 accurate? Even after the bonus, could your new credit card just lead you to need debt relief in the future?

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 three months of opening it in order to earn a $200 cash back bonus, or spend $3,000 in six months to earn 80,000 points or miles for travel.

It’s important to understand the details to decide whether you can earn the bonus without unnecessary spending and if the benefits of the bonus outweigh the requirements to get 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 make purchases you wouldn’t normally 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, here's what to look for to make a decision:

• 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, miles, 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 answering 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 in the near future. 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 mortgage, car loan, or personal 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 three months. Whether you can spend that much depends on how much you typically charge to your credit cards each month.

It's best to avoid 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 on the purchases you’d make anyway.

3. Will you take full advantage of the bonus and rewards program?

Consider the nature of the bonus, 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, gift certificates, etc.)

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

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

Some credit cards have an annual fee, which can range from less than $100 to several hundred dollars. 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?

Consider whether the interest rate of the new card is higher or lower than that of 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 your spending to the new card. If you find that the bonus is superseded by higher interest costs, then it will likely add to your 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 six 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 could be a better idea for you (if you have a plan to pay off your debt before the introductory rate expires).

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 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. The 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 debt cycle. One option is working with a professional debt relief company like Freedom Debt Relief. Find out if you qualify today.