The Basics of Credit Card Sign-up Bonuses

Disclaimer: I am not a licensed financial adviser and the information in this article is not meant to be individualized financial advice. Everyone’s situation is different so if you are unsure about what to do with your funds, please seek an adviser that can consider your own individual case and make recommendations to you. Some of the links in this post are my personal referral links and we will both receive bonuses if you sign up through them.

I realized after some questions and comments on previous posts that I may have gotten a little ahead of myself with detailing credit card sign-up bonuses without first talking about the basics of how they work. I understand that for someone that has spent most of their life hearing about how terrible credit cards are, more convincing and explanation may be warranted before you decide to venture down this road. I want to try to answer some questions that you may have about the sign-up bonus process and possibly dispel some myths about credit cards along the way. As I’ve written about previously, credit cards are not the enemy, and you can make a significant amount of extra money with credit card sign-up bonuses.

The first thing that you may be wondering about is how you will go about not paying interest once you sign up for a card and start spending on it. Contrary to what some may tell you, making a purchase on a credit card does not lead to immediate interest. For example, let’s say that I have a credit card with a statement closing date on the 15th of each month. The statement close is when your bill is determined for the previous month of purchases. Credit cards have a grace period in which you are allowed to make your payment, this will be indicated as your payment due date. So for the example above, imagine that I make only one  purchase on the card on January 1st. The statement will close on January 15th and the payment due date will be set somewhere around a month from that point, likely the middle of February. What that means is that you have a month and a half to pay off that purchase before you are charged any interest or fees. You can always make the payment before the due date if you desire (I often do that to make sure that I avoid any fees and to stay on top of my spending). A key point here is that when you make your payment, you are paying the full statement balance and not just the minimum (the minimum will lead to interest charges). In this scenario, you get a 45 day interest free loan on your purchase as well as cashback or points on the purchase if you have chosen a good card. Being charged interest is not a concern if you are paying your statement balance in full each month.

Okay, so interest will not be a factor as long as you stay on top of your bills and don’t spend money that you don’t have. So what about the impact of a credit card on your credit score? For most people, opening a few credit cards will actually increase your credit score (as long as you are paying your statement balance as indicated above). This is due to a couple of factors:

• Increasing your available credit will make you look more desirable to lenders because it means that you have more “wiggle room” if you run into hard times. i.e. you could always begin to carry a balance if you had to for some reason due to an unexpected expense (although this should not be an option for us).
• Making additional payments on time each month will increase your score because it makes you look like a more responsible borrower.

My credit score has decreased over the past year but I expected it and was willing to make this sacrifice for the massive amount of value I got out of the cards (about 20 new cards opened in the past 10 months). Whitney, on the other hand, has opened five cards in the past six months and has gotten very good value from her cards as well but in addition, her credit score actually increased!

Now you may be wondering, if credit card sign-up bonuses and cashback are so awesome, then why doesn’t everyone take advantage and why do credit card companies offer the bonuses if people are making money and getting free travel from them? The answer to both of those questions are very closely related. Not everyone takes advantage of these because only a very small percentage of people are actually responsible with their finances and are able to pay their statement balances each month. This means that most people that sign up for these bonuses end up paying interest on their purchases and lose money in the long run even when taking into account the sign-up bonus and cashback rewards (if you’re saving money and being responsible with your finances, this does not apply to you). It is because of the majority losing money to credit card companies that these awesome offers are available to us and afford us the opportunity to capitalize. The credit card companies are more than happy to lose money on a few people to make money on the majority. The key to all of this is NOT being part of the majority that pays interest and loses money.

What about annual fees that some cards charge? Many of the cards that have annual fees waive the fee for the first year for new card holders. This is convenient since many of the cards that I sign up for, I am only interested in the sign-up bonus and don’t wish to keep the card after that. So in this scenario, I will keep the card for a year, reap all of the benefits, and then cancel it before I ever have to pay any fee on it. There are also quite a few options that don’t have annual fees at all and still offer good sign-up bonuses. Chase Freedom and American Express Blue Cash fall into this category.

I hope that this post eases some of the fears that are associated with credit cards. If you are financially responsible and are doing well saving money, reward credit cards are a no-brainer. Put your expenses on the card (or cards) that you choose, pay them off each month and reap all of the rewards with none of the negative consequences. Enjoy your free travel and cashback! Are there any other questions that you have regarding credit cards or sign-up bonuses?