How to avoid the ‘siren song’ of a credit card sign-up bonus

Nearly half of consumers holding a credit card with travel perks opened the card to chase the rewards — and a big share of them blew their budgets in the pursuit, according to a new survey.

Specifically, 45% travel credit cardholders opened a card solely for its sign-up bonus, according to a ValuePenguin poll of 1,008 consumers. However, 32% of consumers whose credit card came with a sign-up bonus say they spent more than they could afford to meet the card’s requirements.

Credit-card companies pitch sign-up bonuses to attract new customers.

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Generally, they offer benefits like a cash bonus or “points” that can be redeemed for travel discounts. However, customers must spend a certain sum — often hundreds or thousands of dollars — within a preset time period to see those rewards land in their account.

Examples of sign-up bonuses they might encounter, according to Ted Rossman, a senior industry analyst at CreditCards.com, include those from the Chase Sapphire Preferred and Wells Fargo Active Cash cards.

The Chase Sapphire Preferred card is currently offering 60,000 points (the equivalent of a roughly $750 bonus for travel, Rossman said) to new users who spend at least $4,000 in the first three months. The Wells Fargo Active Cash card has an offer for a $200 cash bonus to customers who spend $1,000 in the first three months.

Sign-up bonuses can be lucrative but may also be a “siren song” if customers don’t use their cards wisely, Rossman said.

Overspending can snowball into a larger issue for consumers if they’re unable to fully pay their bill each month. Making just a 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 those rewards you’re chasing.

“Credit cards are like power tools: They could be really useful, but they could be dangerous, too,” Rossman said.

Many travelers appear to be seeking out cards with travel rewards amid rising vacation costs, ValuePenguin said. Forty-nine percent of survey respondents are considering applying for a travel card in the next six months, according to its poll.

Before getting a card, consumers should first understand its guidelines. For example, how much time do you have to reach the spending minimum? What benefits will you get? Is there an annual card fee?

The sweet spot: when there’s a valuable bonus as well as an intent to use and benefit from the card over the long haul, Rossman said.

“Consider the total cost of ownership: the bonus, annual fee and how you’ll use the card,” he said. “Everyone’s a little different.”

Customers can best take advantage of a card by spending as they normally would. In other words, don’t spend more money than is typical for 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 card that requires you to spend $6,000 in three months.

Ideally, you’d be able to get the bonus through a normal routine of expenditures, and pay your bill in full to avoid interest charges.

Or, you can time a large purchase you’d been planning anyway — like a home renovation or a big trip — with the opening of a new credit card. This is an easy way to hit a card’s dollar threshold without overspending, Rossman said.