If you could easily make several hundred extra dollars a year with minimal effort, would you do it? Most people would say yes, but when you tell them that the way to do it is by opening new credit card accounts, they get nervous. They're afraid the new accounts will damage their credit scores or that there's some kind of catch.
The truth is that it's easy to make money from credit card sign-up bonuses, and there's minimal damage to your score as long as you pay your bill in full and on time and look out for annual fees. If you’ve never had a problem with opening too many credit cards or charging beyond your means, you really can come out ahead with these offers, if you handle them carefully. And they're showing up more and more. Credit card sign-up bonuses offering cash back, points and miles were 10% higher in the first quarter of 2014 than in the first quarter of 2013, according to CardHub’s quarterly credit card landscape report.
Common incentives for opening a new card include enough frequent flyer miles to get a free plane ticket, points that can be redeemed for high-value gift cards and generous statement credits that put cash back in your pocket. If you already have a credit card that you manage responsibly, you shouldn't have any trouble taking advantage of credit card sign-up bonuses. If you don't have a credit card but you've been thinking about getting one, why not apply for one with a top-notch perk? (Bone up on credit cards with our tutorial What To Know About Credit Cards.)
Understanding Credit Card Sign-up Bonuses
Here are some tips for making the most of those bonus offers without spending more than you should.
Choose the Right Offers Only you can decide what kind of bonus is worth the effort of opening, using and canceling a new account. Is a $20 bonus sufficient? Or do you require a higher threshold, like $100? Do frequent flyer miles entice you, would you rather earn points that you can redeem for gift cards, or is only straight cash back good enough?
Some cards require you to spend a certain amount of money within a certain timeframe to get the bonus. For example, a card might offer 50,000 bonus points worth $625 toward airfare or hotels, but require you to spend $3,000 within three months of opening your account to earn those points.
Understand and Follow the Offer’s Terms The main page advertising the sign-up bonus offer – not the terms and conditions document – is usually where you'll find the requirements. Read this page carefully to make sure you understand the deal.
If you have to spend $1,000 within three months to earn your bonus, make sure you know when the three-month period expires. It probably starts the day you apply for the card – not the day the card is mailed, the day you receive the card, the day you activate the card or the day you make your first purchase.
Another common scenario is that the card will have an annual fee that's waived for the first year only, so you'll want to make sure to consider canceling the card before you incur the fee at the beginning of year two. You don’t want to pay an annual fee unless you're getting a deal that significantly outweighs it. If you're worried about having to make an uncomfortable phone call to close your account, don't be – you can always mail a letter to customer service, and some companies will let you cancel by email.
Don't Be Afraid of the Fine Print Many people are intimidated by signing up for new credit cards because they're afraid of what might be buried in the fine print, but the terms are usually laid out quite clearly. When you're looking at a deal online, just click on the link that says "Terms," "Terms and Conditions," "Pricing and Terms" or something similar to learn whether the card has an annual fee. The APR, late fee and other details shouldn't affect you if you're planning to pay your balance in full and on time. But be sure you do pay the balance in full. Paying high credit-card interest rates can affect your disposable income and your investment returns. Check out Understanding Credit Card Interest.)
You Decide: Easier Bonuses vs. Larger Bonuses Some sign-up bonuses kick in after you make a single purchase. While these aren’t the most lucrative offers, you’ll get your reward quickly and there’s less chance that you’ll fail to meet one of the offer conditions and not receive the bonus.
Cards that require you to stick around to earn the new cardholder bonus aren't the fastest way to earn rewards, but they tend to have higher payouts. If you’re willing to spend $5,000 on a card within 3 months of becoming a cardholder, you might get $600 in cash back. However, you’ll have to make an ongoing, special effort to use the card so you’ll earn the full reward. Otherwise, you risk forgetting about it and missing out on your bonus.
Don't Overspend to Get the Bonus For cards that require you to spend a certain amount within a certain timeframe to qualify for the bonus, it can be tempting to spend more than you usually would to meet the threshold. Use the following strategies to make sure you’ll spend enough to earn the bonus without blowing your budget.
– Buy grocery-store gift cards. Use your credit card to prepay for your next few months’ worth of groceries by purchasing gift cards for your favorite grocery stores. To avoid overspending because gift cards don’t feel like real money, try the envelope system. If you normally spend $200 a month on groceries, buy $1,000 in grocery-store gift cards and put $200 worth in each of five envelopes labeled with the month when you'll use them.
– Buy other gift cards. Use the same method to “prepay” any other expenses you regularly incur, like gas, or to “prebudget” for discretionary expenses you incur regularly – visits to certain restaurants, movie theaters or retail stores. To get the most bang for your buck, it's best to stick to gift cards for stores that fit in with your normal spending patterns. (Avoid these pitfalls to keep your credit score healthy and your debt under control. See 6 Major Credit Card Mistakes.)
–Think ahead for birthdays and holidays. There are certain people and occasions you know well in advance that you’ll need gifts for – Christmas, weddings, baby showers, birthdays and Mother’s Day, for example. Shopping at the last minute is stressful, so get these non-optional social conventions out of the way early and earn a credit card bonus at the same time.
– Use your card for charitable donations. Do you normally wait until December 31 to make your annual donation to your favorite charity? Do it early this year and put it on your card.
– Stop making small purchases with cash. A Federal Reserve study shows that cash is still the most popular way to pay. But when you’re trying to earn a credit card bonus, even your $2 cup of coffee should go on your credit card. As an added bonus, you’re less likely to lose track of your small purchases when you can see them on your credit card statement, so this habit can help with budgeting.
– Switch bill payments to your new card. See if you can pay monthly bills, such as your cell phone and cable TV, with the credit card instead of a check. You should usually skip this option when paying with a credit card means incurring a fee, but if the fee is small and paying the bill with your card will mean the difference between earning the bonus or not, it’s probably worth it.
Going After Card Bonuses & Your Credit Rating
What happens to your credit score if you are the sort of person who keeps opening and closing credit card accounts – a practice called “churning” – to earn sign-up bonuses? The short answer is, it doesn't help your score. But it’s difficult to know by how many points it hurts your credit rating since the credit bureaus keep their precise scoring formulas secret. The Fair Isaac Corporation, which is responsible for the FICO score, has made public some general guidelines. The three factors credit card churners should consider are these:
1. The hard inquiry or hard pull. This is credit-bureau terminology for someone applying for a credit card or a loan. Every time this happens, your score takes a slight, temporary hit. FICO says new credit-application activity makes up 10% of your score.
2. Credit utilization. The percentage of your total available credit that you’ve used accounts for 30% of your score. Applying for new cards increases your available credit, but using some of that credit while you’re meeting spending requirements for sign-up bonuses decreases it. The important thing is to keep your total credit-utilization ratio across all accounts below 20%.
3. Length of credit history. The average age of all your credit accounts combined with the total number of years you’ve had a credit history makes up 15% of your credit score. If you’re new to credit and have many new accounts, churning is more likely to hurt your score than if you have a long-established credit history. In either case, the more new accounts you open, the more it could hurt your score.
Obtaining the highest possible credit score matters most if you want to open a credit card account or borrow money. If you might apply for an important loan like a mortgage in the next 12 months, don’t take the risk of dinging your score by opening new accounts just to earn sign-up bonuses. Otherwise, don’t worry about your credit score too much as long as you’re paying your bills in full and on time and not using too much of your available credit.
Redeem Your Rewards Promptly Sometimes credit card rewards programs are cut back. It might take 12,000 points to get a $100 gift card when it used to take only 10,000 points, or it might take 35,000 miles to get a plane ticket instead of 25,000. If you wait too long to redeem your rewards, you might not get as high a bonus as you anticipated. Worse yet, you might forget to redeem your rewards altogether.
Don’t Feel Guilty
Don't let the thought of opening a card, getting the bonus and then closing the card make you feel guilty. Credit card companies are businesses, and they're free to set whatever terms they want for their bonus offers. If they want to give you $100 after you make your first 99-cent purchase on iTunes with no further obligation, that's their choice, and you're free to take advantage of it. If they want to define a "new cardholder" as anyone who doesn't currently hold that credit card and allow you to repeatedly apply for the same card, get the bonus and then close the card, that's their choice, too. Card companies can always make the terms of the deal more restrictive if they want to make sure you'll stick around longer – and they often do. In addition, credit card companies earn a percentage fee from the merchant for each transaction you make.
The Bottom Line
If you can manage credit responsibly, credit card sign-up bonuses are a way to make some extra scratch. If you can't manage credit responsibly, though, don't try to play the new account bonus game. The late fees and interest payments will eat you alive, and the rewards will hardly make a dent in the bills you rack up.