The offers always sound incredibly tempting.
Get 100,000 travel rewards points when you sign up for this credit card!
Get a free trip just for signing up for this new credit card!
Of course, once you read the fine print, the offers may not seem so tempting; in fact, they may land you in a world of financial trouble if you always try to qualify for introductory bonus offers.
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What Are Introductory Credit Card Offers?
Introductory credit card offers are special reward packages that incentivize you to spend with your credit card during the first few months of acquiring it. From an advertising perspective, the offers are used to tempt you into signing up for a new credit card.
While the details of each credit card offer varies, the big ticket bonuses all have a similar structure.
You can earn a large amount of rewards points (perhaps 30,000, 50,000, or 100,000 points) if you spend a certain amount of money within a set period of time (such as $4,000 in 3 months or maybe just $500 in 90 days) on a given credit card.
Typically, these rewards are a better deal than the standard rewards rates; for example, a cardholder could get 20 percent back after spending $1,000 as opposed to a standard cash back rate of 1 or 2 percent.
Why Do They Make These Offers?
These credit card offers exist for a simple reason. Credit card companies want your business, and they want you to use their card.
Credit card companies make more money if more people sign up for their cards, and they make even more money when you carry a balance on your card. By spending a ton to earn an introductory bonus, you are more likely to carry a balance, accrue interest charges, and even pick up late payment fees which lines the wallets of the credit card companies.
For many people, these credit card offers are too good to pass up; a bonus of 50,000 or more miles can allow them to book a plane ticket or a stay in a premium hotel, allowing them to take a long-desired vacation. It would take most people years to build up those points under the standard rewards rate, so the introductory offers are incredibly tempting.
Things To Consider
In order to get those coveted bonus points, you have to spend a lot of money in a short amount of time — often more than you would otherwise spend. For many people, this can lead to irresponsible spending on the theory that you’re actually getting some sort of deal because you’re earning free points. But in reality, the thousands of dollars that you may be spending to get the points will likely end up costing more than the value of the points.
While 50,000 or 100,000 points may seem like a lot, the cash value is actually pretty low. Typically, a 50,000-point bonus translates to around $500 in cash. In effect, the 50k bonus sounds like it’s worth a ton, but the numbers are inflated, insinuating to greater value.
For example, take the bonus offer for the Chase Sapphire Reserve Card: 50,000 Ultimate Rewards Points for spending $4,000 in three months. At best, these points can be redeemed for 1.5 cents each for traveling purposes which means that those 50,000 points have a cash value of $750. This card has an annual fee of $450 which reduces the value of the rewards points considerably.
At this point, the interest charges haven’t even been taken into account. If you put $4,000 on your credit card and do not pay off the balance in full, you will quickly eat up the remaining benefit of the $750 in bonus points by paying interest on your balance. On top of that, this is the best case scenario; redeeming those points for anything other than travel puts them at a value of only $500.
How To Do It Right
Of course, it is possible to use a rewards card strategically in order to maximize the benefits from these bonus offers. The trick is to only use credit cards for purchases that you would have made anyways while paying off your balance in full each month.
For example, if you were remodeling your kitchen and were planning to spend $5,000 on new appliances, then it may make sense to open up a credit card with a bonus offer in order to get the rewards points. This way, you could actually recoup some of your expenses without needlessly taking on credit card debt.
Credit cards rewards offers are often appealing, but just remember they are appealing for a marketing reason. The cards want you to sign up for your products; coincidentally, these are products that could hurt your credit and put you in debt. Use them wisely.
I completely agree, credit card companies use powerful marketing tools to lure you in to buy products that will set you up for debt. Unfortunately, they do it because they can. There are few people able to resist spending and so many who swipe that plastic like there’s no tomorrow. Personally, I do have a credit card now but use it so rarely, the company might as well call me to ask if I’m still alive :D