A number of my financial coaching clients ask me if they should apply for a new credit card in order to reap the benefits of sign-up bonuses. I must admit that these programs are quite tempting as a number of them offer significant cash, travel, or other rewards. I have personally reaped the benefits of a number of such programs over the years.
Normally, I advise my clients that using such programs can be quite beneficial as long as you make them work for you instead of the other way around. Here are some ways to do just that:
Use the Credit Card to Boost Your Credit Profile
Almost every major credit card issuer is competing for your business. There are many sign-up bonuses to choose from, which can be overwhelming. Most of my clients who inquire about this usually want to apply for 3-4 cards at the same time so that they can maximize their ability to get rewards.
This is not usually a good idea. Every time you are approved for a credit card your credit report is pulled. This can drop your credit score by up to 5 points and the inquiry can remain on your report for up to two years. However, if you are approved for the card this temporary drop in your score will typically be reversed within a month or so.
In fact, if you are approved your credit score may increase in the very next credit cycle due to the increase in revolving credit available to you. That is if you maintain low credit utilization during the same period. Contrarily, if you max the card out as soon as you receive it your credit score will drop even lower as a result of a high credit utilization rate.
So in order to allow the sign-up bonus to work for you in this regard, try to space your credit card applications out in order to decrease the impact of your credit rating. If you wait 3-6 months between credit card applications you will give your credit score an opportunity to rebound from credit check inquiries. And if you maintain a 30% or lower credit utilization rate you can quickly increase your credit score since you now have more credit available to you.
Note: If you are in the market for a big purchase such as a house or vehicle, it is better to wait 6 months or longer between applications. Even if your credit score increases, too many credit inquires can make you a credit liability. In which case you may have a harder time getting approved for such loans.
Use the Credit Card for Normal Purchases
Whenever you avail financial or other rewards tied to sign-up bonuses do not deviate from your normal spending patterns. Most credit card reward programs require you to spend a certain amount of money within 3-4 months of opening the account in order to receive the sign-up bonus. Some of the better rewards that equate to $500 or more in cash, points, or other bonuses usually require that you spend about $3000-$4000 within this 3-4 month window.
This is a completely achievable task that can be beneficial or detrimental to your credit depending on how you go about accomplishing it. If you use the card on regular purchases that you normally make each month and pay off the balance by the due date you can rack up some beneficial rewards. On the other hand, if you decide to go on an unplanned shopping spree and accumulate a bill that you can’t readily pay off by the due date you can easily run into financial problems.
In order to make the reward program work for you in this scenario, you should only spend what you can pay off without carrying a balance. The goal is to not get in debt, otherwise, you will simply use the reward to pay off the debt instead of for something useful.
Use the Sign Up Bonus to Build Wealth
Before you receive your sign-up bonus make plans to spend or use it wisely. If you are getting cash back or a statement credit, don’t think about this as extra money that you should spend recklessly. There are a number of ways to make the sign-up bonus work for you, which include:
- Paying your bills
- Reducing your debt
- Putting the money in savings
- Investing in the stock market
While I take a very practical approach to money management, I encourage my clients to always think of ways to build wealth. The extra money from sign-up bonuses, inheritances, lottery winnings, and the like should not be wasted simply because they aren’t part of your normal income stream. We shouldn’t look at these sources of income as “play money”. There is no such thing. All money can and should be used in a productive manner.