Should I take advantage of credit card point offers?

You know the offers – the ones that flood your real mailbox, your email mailbox, the grocery store checkout aisle, and just about anywhere else imaginable. “Sign up for Card X and get 50,000 free points!” Banks and other issuers have seemingly been pushing an endless stream of points, miles, and any other reward-based terminology for the past several years, largely led by Chase’s really, really successful rollout of their Sapphire-branded cards. So with anything that involves a company offering you something for free, it’s always important to ask a basic question – what’s the catch? And so that’s what we’re going to do. We’re going to tell you what the catch is so you can decide whether you should take advantage of credit card point offers.

Let’s talk first about fees. Many, but not all of the credit cards that have these types of offers have annual fees in order to keep them open. They’re often waived for the first year, but that means on your 12-month anniversary, you’re going to have to pay that fee. In some cases, that fee can be pretty low – some cards have annual fees as low as $25. Others can creep up into the hundreds of dollars, with Chase’s Sapphire Reserve and American Express’s Platinum Card clocking in at $450 and $550 per year, respectively. While there are plenty of no-fee cards out there, they typically lack the big sign-up bonuses that you see on these cards, so you need to understand the cost of carrying the card if you end up holding it for more than a year.

The second piece of information that tends to be in the fine print of these offers is that you often have a minimum level of spending required over a certain time in order to get the points from the offer. So you may have to spend $3,000 over three months or $4,000 over six months in order to get the points deposited to your account. This isn’t necessarily a bad thing, but it does mean that you don’t get the points by simply signing up for the card. You typically have to use it in order to do so.

The third and final thing to be aware of is the credit card interest rate that may be charged on the balance you have on the card if you don’t pay it off every month. Many high-end rewards cards tend to have higher interest charges, sometimes in the high-20% range, or even into the low-30% range. These interest rates may also adjust if other interest rates move up or down, as they may be tied to a benchmark rate, such as LIBOR or the prime rate. So it’s really, really important to understand just how much interest you may be paying if you end up with a balance you can’t pay off every month on one of these cards.

So knowing the risks, are these cards a good idea for you?

They can be, if your spending fits in well with the type of rewards offered by the card. For example, let’s say you choose a card with a huge point bonus that gives you bonuses for spending on travel and also has a hefty fee. If you don’t travel much but love to eat out, why are you choosing this card as opposed to one that gives you bigger points for restaurants? So a key thing to consider is where your spending tends to be and whether the type of rewards and bonuses for a particular card make sense for you.

The second piece to consider relates somewhat to the first – don’t go opening a new credit card for the points bonus if you have to spend more than you usually would in order to qualify for the bonus. Let’s use one of the examples listed above. Suppose a credit card is offering you 50,000 points if you spend $3,000 on the card in the first three months you have it. If you only spend $500 per month on your card normally, and only feel comfortable spending that money, you’re likely going to end up accruing a balance that you can’t pay off immediately at the end of that three month period. So if you end up with $1,500 in outstanding debt and have to pay 30% interest on that debt and can only make the minimum credit card payment, you’re now stuck paying $450 per year in interest until you can get that balance paid off. The interest you pay may end up being worth more than the points you receive. So be careful if an offer requires you to spend more than you’re comfortable spending in order to qualify for the bonus.

The big thing to realize, above all else, is that credit card companies don’t offer these perks to you out of the goodness of their hearts. They offer them to you to get you to pay them more money when it’s all said and done. Sure, they make a little bit of money on interchange fees for processing transactions. But they want to collect the larger annual fees and potentially interest payments from you if you can’t pay your balance off every month.

I have used a number of different credit card rewards sign-up bonuses. They can be a really effective way to get yourself on the path to getting free stuff – whether cash-back, travel, dining, or any other type of reward that appeals to you. But make sure the card isn’t getting you to change your behavior just for the sake of getting points. Don’t blow a hole in your budget just because you might be able to get enough points to cover half of a trip to Hawaii. You are playing into their hands if you do that. But if you can find points bonus offers that fit your current budget, make sense based on the type of spending you tend to do, and have an annual fee that you feel comfortable spending, then these offers might work for you. But do your due diligence and know what you’re getting into before signing on the dotted line.