How to avoid the “siren song” of a credit card sign-up bonus
Virojt Changyencham | time | Getty Images
Nearly half of consumers holding a credit card with travel benefits opened the card to chase rewards — and a large portion of them blew their budget in pursuit, according to a new survey.
Specifically, 45% of travel credit cardholders opened a card just for its sign-up bonus, according to a ValuePenguin survey of 1,008 consumers. However, 32% of consumers whose credit card comes with a sign-up bonus say they spent more than they could afford to meet the card’s requirements.
Credit card companies offer sign-up bonuses to attract new customers.
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Typically, they offer perks such as bonus cash or “points” that can be redeemed for travel discounts. However, customers must spend a certain amount – often hundreds or thousands of dollars – within a pre-set time frame to see these rewards land in their account.
According to Ted Rossman, senior industry analyst at CreditCards.com, examples of sign-up bonuses they might encounter include those for Chase Sapphire Preferred and Wells Fargo Active Cash cards.
The Chase Sapphire Preferred card currently offers 60,000 points (the equivalent of a roughly $750 travel bonus, Rossman said) to new users who spend at least $4,000 in the first three months. The Wells Fargo Active Cash Card offers a $200 cash bonus to customers who spend $1,000 in the first three months.
Why sign-up bonuses can be a “siren’s song”
Sign-up bonuses can be lucrative but can also be a “siren’s song” if customers don’t use their cards wisely, Rossman said.
Overspending can snowball into a bigger problem for consumers if they are unable to pay their bill in full each month. Make just one minimum payment each month and carrying a balance, for example, subjects customers to high interest rates that can spiral out of control if left unchecked. It also erodes or even eliminates the value of the rewards you seek.
“Credit cards are like power tools: they can be very useful, but they can also be dangerous,” Rossman said.
Many travelers seem to be seeking cards with travel rewards amid rising vacation costs, ValuePenguin said. Forty-nine percent of survey respondents plan to apply for a travel card in the next six months, according to its poll.
Before getting a card, consumers must first understand its guidelines. For example, how much time do you have to reach the minimum spend? What benefits will you get? Are there annual card fees?
The sweet spot: when there’s a valuable bonus as well as an intent to use and benefit from the card over the long term, Rossman said.
“Consider the total cost of ownership: the bonus, the annual fee and how you will use the card,” he said. “Everyone is a little different.”
Customers can take better advantage of a card by spending as they normally would. In other words, don’t spend more money than usual on your household just to get a bonus, Rossman said.
For example, if you normally spend $500 a month on a credit card, don’t sign up for a card that requires you to spend $6,000 in three months.
Ideally, you would be able to get the bonus through a normal spending routine and pay your bill in full to avoid interest charges.
Or, you can time a major purchase you had planned anyway — like a home improvement or a big trip — with opening a new credit card. It’s an easy way to reach the dollar card threshold without spending too much, Rossman said.