3 Ways to Make the Most of Sign-Up Bonuses

Free cash from your credit cards never hurts. Here's how to put it to good use.

Of the various features a new credit card might offer, a sign-up bonus is perhaps the most appealing. With a sign-up bonus, you get cash back for spending a certain amount of money within your first few months of opening a card. The specifics vary from card to card, but as an example, you might score $500 for spending $3,000 on a credit card during your first three months as a cardholder.

If you've gotten a sign-up bonus recently, it pays to put that cash to good use. Here are a few ways to maximize it.

1. Use the money to pad your emergency savings

Financial disasters can strike at any time, without warning. You could lose your job, get hit with a huge home repair, or run into trouble with your car. Without savings, you risk running up a credit card tab to cover those expenses. Therefore, if you're low on savings, it pays to consider using your sign-up bonus to pad your emergency fund. That way, you'll have money on hand for any purpose, unplanned bills included.

2. Use that cash to pay off debt

Debt is a dangerous thing. Not only can it cost you money in the form of interest charges, but it can also wreck your credit score, making it more difficult -- and expensive -- for you to borrow money when you need to. If you're sitting on a sign-up bonus but already have unhealthy debt -- particularly that of the credit card variety -- then it pays to use the money to chip away at your balance. Doing so automatically saves you money on interest and brings you closer to living debt-free.

3. Spend the money on necessities

Maybe money has gotten tight in your household. Tempting as it may be to use your sign-up bonus for splurges like a new TV or a clothes-buying spree, you're better off putting that money toward basics like food, medication, and utilities. Even though a sign-up bonus might technically count as free cash and you'd normally rely on your paycheck for essentials, there's nothing wrong with shifting gears to accommodate your ever-changing financial circumstances.

Should you chase sign-up bonuses?

The quick answer? No.

While there's nothing wrong with capitalizing on some sign-up bonus offers, be careful not to go overboard. Sign-up bonuses require you to spend money to get money. If you're spending on things you were planning to buy anyway, there's lots to gain. But many people fall into the trap of racking up a credit card tab just to get "free" cash, adding to their debt load in the process.

Also, the more credit cards you apply for within a relatively short period, the more your credit score can get dinged. Therefore, choose your sign-up bonuses judiciously, and make sure they're actually attainable. If you're not sure you'll qualify for them easily and you don't need another credit card, then you may be better off not applying.

That said, if you've already obtained a sign-up bonus, make the most of it -- even if that means spending the money responsibly instead of using it on something fun.