The upside of using a credit card is getting rewarded for the purchases you’re planning to make. And in addition to the regular credit card rewards you can rack up on an ongoing basis, some cards also offer a sign-up bonus when you first open your account.
Usually, with a sign-up bonus, you’ll get a lump sum of cash back in exchange for meeting a specific spending requirement. For example, you might get an offer of $250 cash back for spending $3,000 within three months of opening your new card.
In some cases, though, a sign-up bonus can be hard to snag. If you’re someone who typically spends $750 a month on essential expenses and tries to limit spending outside of that, you’re talking about racking up $2,250 in credit card charges over a three-month period. If you need to spend $3,000 to claim your sign-up bonus, that may not happen — unless, of course, you expect to do an unusual amount of spending.
Such is likely to be the case for a lot of people during the holidays, though. And that’s why now’s a great time to chase a sign-up bonus.
Consumers celebrating the winter holidays expect to spend an average of $875 on gifts, decorations, food, and other key seasonal items, according to the National Retail Federation. So going back to our example, let’s say you normally spend $2,250 on your credit cards over a three-month period on essential expenses. If you expect to spend another $875 on top of that on holiday purchases, that gets you to (and even pushes you past) your $3,000 target.
Also, a lot of people tend to travel for the holidays. The bad news is that travel during this time of the year can be expensive. The good news is that you might have no problem snagging a sign-up bonus if you’re charging expenses like airfare and lodging.
It makes sense to go after a sign-up bonus at a time when your spending is expected to increase. But one mistake you don’t want to make — during the holidays and in general — is overspending just to claim your sign-up bonus. What you gain in the form of cash back, you might lose in the form of costly interest, not to mention damage to your credit score, which can happen if you carry too large a credit card balance relative to your total spending limit.
Of course, there are exceptions to this rule. Let’s say you can afford to spend $2,900 over a 90-day period to get your sign-up bonus, but you need to carry your remaining $100 balance forward a month or two. If you’re getting $250 back from your credit card company, you can use that money to pay off that $100 balance plus whatever interest has accrued on it over that brief period, and you’ll still be ahead financially.
But you don’t want to carry a multi-thousand-dollar credit card balance forward to claim a sign-up bonus. If you rack up a $2,000 balance to snag a $250 sign-up bonus and it takes you two years to pay it off at 20%, you’ll end up spending $443 on interest. That’s more than your $250 bonus cash, which means you lose out financially.
All told, it’s a good idea to go after a sign-up bonus during the holidays if you’re planning on extra spending and know you can afford that extra spending. But if that’s not the case, then you’re better off passing on that sign-up bonus and setting priorities to avoid overspending on holiday expenses.
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