Are Credit Card Sign Up Bonuses a Scam?
Credit card sign up bonuses may sound like a scam sometimes, but they aren’t if you’re smart about managing your credit card spending and bill payment.
Sign up and get $350 cash back! Sign up and get 5000 points! Sign up and pay 0% interest! You’ve seen these claims on everything from the billboard to your junk mail. Every credit card advertisement seems to be selling a card and a deal that’s too good to be true. How can they give away points and money just for registering for the card? Everyone knows that first lesson in economics: there’s no such thing as a free lunch. So, with credit card sign up bonuses, who’s paying?
It’s a Contract: Follow it and You’ll be Fine
Each of the sign up bonuses comes along with a contract between you and the credit card company. The sign up bonus is an offer that is available to you under specific conditions. The condition may be that you are required to put a certain amount of money on the card within a certain period of time. Or, the great terms may be limited to a certain length of time. These conditions are usually clearly listed and they must be meticulously followed.
For example, the Chase Sapphire Preferred card has a sign-up bonus where you can earn 50,000 bonus points when you spend $4,000 on purchases in the first three months of opening the account. Those points are the equivalent to $625 in travel when you redeem them through Chase Ultimate Rewards. It sounds like a pretty sweet deal, and it certainly is – if you’re planning on charging $4,000 to your credit card the next three months. And, most importantly, it’s a sweet deal if you’re also able to pay off $4,000 from your card by the payment due dates.
What is a credit card?
When considering all the sign up bonuses, it’s important to remember what kind of product you’re signing up for. Credit cards allow you to borrow money from your bank to make purchases that you then pay back later. It’s a convenient tool for purchasing anything from a latte to airfare to Rio. You have a certain period of time to pay back the money, but if you don’t do so in that grace period, you’ll need to pay back the money and a percentage of interest on the amount owed. Banks don’t loan money for free and this interest is big businesses.
In the example above, the sign up bonus is provided if you spend $4,000 in three months. For some people, this amount of money is a normal amount that they charge and pay off in three months. For other people, they need to spend more to meet the $4,000 bonus sign up. If this is more than they usually put on a credit card, it’s also more than they usually pay off of a credit card. Even if they pay off part of the balance, but $1,000 is left and is charged interest. Depending on how long balance remains and therefore how much interest is charged, the interest payment can eliminate any bonus that came with the sign up points. Alternatively, they find out they can’t afford to put $4,000 on the credit card in three months. In this scenario, they avoid paying interest, but they also lose the sign up bonus.
Another potential pitfall is in the zero interest sign-up bonus. The Discover it® credit card charges 0% interest for the first 12 months. This is a sweet deal if you want to make a large purchase, like a laptop or minor home renovation supplies, and pay it off over a few months. You can borrow that money for no interest at all over that first year. However, after that first, glorious year, you will have to pay interest on any remaining balance. Carrying a balance on your card went to being worry-free to whoa-expensive. Also, once the interest kicks in, it’s as a variable annual percent rate (APR), which is connected to your credit score. You can get a great rate if you have great credit. If your credit score isn’t so hot, you could end up on the high end of the APR scale. Any balance left on in Month 13 will be costly.
Sign Up Bonuses are a Scam Only as Much as Credit Cards are a Scam
The sign up bonus is no more a scam than credit cards themselves are a scam. Credit cards are an extremely expensive way to borrow money. They are very useful when used wisely and with prudence. However, as soon as a credit card has a late payment or a balance that collects interest, they are a big money maker for the banks. There is nothing unclear or evil with a credit card or a sign up bonus. They are simply financial agreements between you and the company. So long as the contract is followed, there is no issue. However, the sign up bonuses can require balances that some consumers cannot pay off, and so will accrue interest. However, it’s the responsibility of each consumer to decide if they can meet with conditions to receive the perks without any downside. The contract is clear, but it’s up to you the consumer to keep up their end. The credit card company stands to make a lot of money if you don’t.
Credit card sign up bonuses are not a scam. They are a marketing tool with clear terms and conditions. Some may be built on setting people up to hold a balance on their card, but the decision to sign up and accept the financial conditions is up to the consumer. Companies provide clear statements about the bonus conditions and timelines. If you can use a credit card with clever caution, you can save money and even make money with these bonuses. However, you have to remember that there’s no such thing as free lunch. If you’re not careful about paying off your credit card and remembering the changes in your card conditions, you will pay for your free lunch with your card balance interest.