3 Dangers of Chasing Credit Card Sign-Up Bonuses

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  • A sign-up bonus could put a lot of money back in your pocket.
  • It might also end up costing you money in surprising ways.
  • Overspending and carrying debt are a few things to watch out for. 

Don't be lured by free money without thinking things through.

Credit card companies are great at getting consumers to open up accounts. That's because they know to offer up big incentives, including sign-up bonuses.

If you're not familiar with the sign-up bonus, it goes something like this: 

  • Spend X amount of money within X months of opening your account
  • Get X amount of cash back to enjoy

So you might, for example, see an offer for $200 cash back if you spend $2,500 within three months of opening your new credit card account. Easy enough, right?

The problem with sign-up bonuses, though, is that they're not always so easy to qualify for. And even when they are, they could lead to other unwanted consequences. Here are a few reasons why chasing these offers could get you into financial trouble.

1. You might overspend to meet your bonus requirement

It's one thing to walk away with a free pile of cash for making purchases that were already on your list. But if you end up spending more to get free money, you won't actually come out ahead financially.

It's sort of like the concept of buying sale items for the sake of getting a bargain. If a $50 toaster oven is on sale for $20, but you don't need a toaster oven, you didn't just save $30. Rather, you spent $20, so you're now down $20.

You could easily fall into that trap with a sign-up bonus. Let's say you normally spend $600 a month on credit card purchases like gas and groceries, and you don't have any one-off purchases planned in the next three months. If you're required to spend $2,500 in three months to snag a $200 bonus, you might push yourself to buy more things to meet that threshold. But if you'd normally only spend $1,800 in three months, not $2,500, then your free $200 will actually end up costing you $700. So all told, you're down $500. 

2. You might end up carrying a balance forward 

There's a danger in spending more than usual on a credit card -- not being able to pay your bill in full. Once that happens, interest charges come into play, and those can be substantial. And if you carry a balance for a long enough period of time, the amount of interest you accrue could seriously erode the value of the cash bonus you receive.

3. You could end up damaging your credit score

Carrying a large credit card balance relative to your total credit card spending limit could cause your credit score to drop. And that could, in turn, cost you money in the form of more expensive borrowing.

Let's imagine you need a mortgage, only your credit score takes a hit as a result of you racking up a large credit card tab to get a sign-up bonus. That could result in a higher interest rate on your mortgage that raises your monthly payments by $15. That may not seem like a lot. But at 12 payments a year for 30 years, you're looking at spending an additional $5,400 -- far more than the $200 bonus you snagged.

Credit card sign-up bonuses are definitely a nice perk. But be careful in the course of pursuing them. You don't want to land in a situation where you worsen your financial situation just to snag a few hundred dollars.

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