Credit card sign-up bonuses have always been a perk cardholders covet when searching for a new credit card, and the stakes are being raised for banks, where the best credit card sign-up bonuses can add up to over $1,000 in value.
In the video segment below, The Motley Fool analysts Michael Douglass and Nathan Hamilton discuss how this trend can be smartly taken advantage of -- and when it could hit your wallet.
Michael Douglass: Nathan, let's talk about an emerging credit card trend that really has big implications for a lot of consumers, and that is the move toward premium credit cards, the ones with these gigantic sign-up bonuses and, often, pretty hefty annual fees.
Nathan Hamilton: There are some uses to them, but what we want to dive into is, some areas where maybe there are some concerns because in mid to late 2016 there were some premier credit cards that came out and said, "OK here's a $400 or $500 annual fee, but we're also going to provide a big sign-up bonus." And for many card holders that are smart about their finances, they make sense, and this isn't a knock on those cards. But ... some of the cards are actually getting approved for credit scores with some people in "fair" territory, which is high 600s for a FICO, or even "good" credit scores, and that may not be the demographic that may be the most relevant or most savvy about their finances and managing credit card debt well.
Douglass: One of my concerns, as well is, when you have a $500 annual fee, you do have to spend a lot of money to make that back-
Hamilton: To offset it.
Douglass: Just to break even, right? Much less actually getting a net win with your credit card, which generally most people should shoot for. If you're not getting 1.5% to 2% back, total net of all fees, that's something to start thinking pretty seriously about -- whether that card really fits your lifestyle. And the amount that people have to spend to make back back that 500 bucks is pretty substantial. Of course, one of the other things is that people do tend to spend more on credit -- about 18% more -- and so particularly with these people with fair to good credit scores, as opposed to the really top tier, that could make a big difference in your budget. I mean, I don't know about you, Nathan, I don't have 18% extra cash all the time, right? That's, I think, also a concerning trend there.
Hamilton: The incentives are in place to get people to spend more money, and it's understandable for a credit care issuer to want to incentivize people to spend. That's how they make money, that's a business model. But looking at it, knowing that people do spend on average, 18% more on credit than they do with debt or cash, and also that the spending requirements for these premier credit cards are many times spending $5,000 within a three-month period, that may not match up with most people's budgets and dangling that carrot to get people to spend to earn the bonus and possibly getting into debt, possibly paying off their balances and avoiding interest, they're all different scenarios. But when you boil it all down and look at it all, there are some things to definitely be aware of if you are looking at those sort of cards.
Douglass: One of the things that I always think about when I'm thinking about big sign-up bonuses is, do I have something I'm going spend a much of money on any way? So if I'm about to travel abroad, do I have some really hefty plane tickets I'm going to be buying anyway? Well, if so, I might as well make money back on them, right? That's opposed to, you know, we got a new sound system three months ago, but I need to spend five grand to get this, so let's get another one. It's where things get more problematic. Fortunately, we've got a lot of really great resources on credit, on budgeting, on really thinking hard about debt and how to use it effectively at fool.com/creditcards. We've got our favorite travel credit cards and also our picks for the best cards overall of 2017, so check us out there. Again, fool.com/creditcards.
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