Credit Card Sign-Up Bonuses: Good Idea or Bad Idea?

May 01, 2013

Ahh, the allure of a credit card sign-up bonus: $100 cash back here, 30,000 bonus miles there. Sounds like a pretty good deal, right? Well, that depends on your budget and how you plan on using your new card.

To be frank, credit cards offer sign-up bonuses for two reasons: 1) to entice consumers to sign up (obviously) and 2) to get you to start using said card immediately. Generally, consumers qualify for the sign-up bonus attached to their card if they spend a given amount within the first three or four months of carrying the card, though there are some really cool credit cards out there that will hand over some bonus cash just for making your first purchases.

There are some useful ways to use these bonus cash back cards … and there are some really bad ways to use these cards too. Here’s a list of good ideas – and bad ideas – when it comes to signing up for a credit card with a bonus offer…

Good Idea: Making a big purchase and paying it back quickly

If you’re using a $100 cash back credit card to make a big purchase – $500 to $1,000 or more – and you’ve already got the money to pay this purchase back quickly, then you can save upwards of $100 or more with one swipe of your card. A handful of credit cards, including the Capital One Cash Rewards card and the Chase Freedom card, offer $100 cash back when you spend $500 in the first three months. Therefore, you can save up to 20 percent on one purchase if your first purchase with your new card meets this requirement. Then again…

Bad Idea: Making a big purchase and NOT paying it back quickly

It’s only smart to use a credit card on a big purchase if you know you can pay it back quickly. If you know you can’t, don’t do it. Amassing that kind of a balance is an easy way to fall into the snowball effect of credit card debt, wherein you pay the minimum balance back each month along with a large chunk of interest. Interest fees can pile up in a hurry and pretty soon the initial $100 you saved on that big purchase doesn’t seem like such a hot deal after all. If you don’t have the funds, it’s best to just stay away from a big purchase using credit cards until you do.

Good Idea: Stay within your budget

It’s smart to choose a credit card whose bonus qualifications meet your current budget. Why not earn some bonus cash or miles for the purchases you planned on making anyway? That said, if a credit card’s bonus offer is a little out of your league, it’s best to look for another card or to ignore the bonus offer attached to your new card entirely.

Bad Idea: Excessive spending to reach your bonus

This probably goes without saying, but it’s hardly worth it to go out of your way to reach your card’s bonus qualifications. If your card rewards you with $150 after $1,000 in spending within three months and your budget has you around $250 a month in purchases, why spend another $250 extra to net $150 in cash back?

You’re still out $100, and you could end up paying interest on that extra balance if you don’t pay it back with haste. Do the math, stay within your budget and don’t let that elusive sign-up bonus derail your finances.

Bad Idea: Blowing your bonus

Finally, once you’ve met the requirements and received your credit card’s sign-up bonus (Congrats, you did it!), it would be a real shame if you blew that bonus without considering your options. For instance, if you have a miles or points credit card, it would be a complete waste to apply those bonus miles or points toward a statement credit.

Often (and essentially always), miles applied to a trip are worth more than miles transferred into cash. Why? Because miles are worth more than one cent each, while cash back generally isn’t. Same deal with gift cards and merchandise. Cash is cash, whereas miles equal a little more.

Along those same lines, you should always redeem your points at your credit card issuer’s online mall or marketplace. A lot of networks are partnered up with some excellent retailers and they offer anywhere from 5 percent to 20 percent discounts when you redeem. This is a good way to rack up cash back or points when you shop online too.

To sum it up, stay away from the statement credits and get some real bang for your buck with your credit card sign-up bonus. Don’t rack up a huge balance just to earn a bonus and choose a bonus rewards credit card that fits your budget rather than the other way around.