Be Wary of Credit Card Offer Perks

Competition among credit card issuers means good news for consumers. Especially with the Federal Reserve moving to raise interest rates and make carrying a credit card balance more expensive – which would presumably discourage borrowing – card companies have to do what they can to attract and retain customers. That’s spurred an uptick in big sign-up bonuses, including cash-back offers and travel rewards, which are at near-record highs, according to personal finance site WalletHub’s 2017 Credit Card Landscape Report.

“There are so many card issuers in the market presently that the competition to get new and keep existing cardholders is an extremely fierce one,” says Jill Gonzalez, a WalletHub analyst. “[Rising rates] further strengthens the competition – card issuers are even more inclined to offer better rewards to retain their customers.”

[See: 8 Ways to Maximize Your Credit Card Rewards.]

Indeed, initial cash-back bonuses in the second quarter of 2017 averaged about $109, 10.3 percent more than a year ago, and ranged from $10 to $500.

Travel rewards, on the other hand, are coming down a bit after last year’s spike in big offerings. For example, when JPMorgan Chase & Co. introduced the Sapphire Reserve card in August 2016, it offered a whopping sign-up bonus of 100,000 travel points – worth $2,100, according to travel site The Points Guy – if you spent $4,000 on the card in the first three months. That offer is now just 50,000 travel points.

On average, the initial travel bonus in the second quarter of 2017 was 14,114 miles or points, down 0.5 percent from last year and 9.4 percent from last quarter (but still an impressive 30.2 percent higher than it was just five years ago).

 

Why are card issuers reining in travel rewards while making it rain cash back? “Travel perks cost issuers more than cash back when they’re actually used,” Gonzalez says. “They’re also widely complained about due to third parties – airlines, hotels, etc. – that the credit card companies can’t control, even though they’re the ones getting the complaints and bad ratings.”

Also, issuers are trying to limit the number of times an individual can score initial perks. Some people have really taken advantage of sign-up bonuses, collecting cards and rewards with a strategy called churning. But issuers are getting wise to this game and implementing rules to stop it. For example, Chase has a 5/24 rule – which is unofficial, but frequently grumbled about by travel connoisseurs online – that seems to reject applicants for many of their cards if they have opened five credit cards or more from any issuer in the past 24 months. American Express only allows you to get a sign-up bonus on the same type of card once in a lifetime.

“A number of issuers now are starting to clamp down on the number of bonuses and rewards you can get,” says Nate Matherson, co-founder of LendEDU, an online marketplace for loans and other financial products. “They don’t want to offer these big sign-up bonuses to individuals who are just trying to game the system.”

So should you pounce on all these generous offers while you still can? It depends. “For some people, some of these perks make sense,” says credit card expert John Ulzheimer, formerly of Equifax and FICO. “For other people, they don’t.”

Basically, whether these deals can benefit you depends on how you use credit already. For example, many sign-up offers require you to spend $3,000 to $4,000 within 90 days of your opening the account to get the bonus. If you typically charge that much – and pay off the balance in full every month – then this deal makes sense for you. “In the short term, it might hurt your credit [score] a tiny bit, but in the long term, as long as you’re keeping your credit utilization at a reasonable level and making the payments on time each month, having three or four credit cards is not a problem,” Matherson says. “In fact, it can be a very lucrative strategy.”

But if you rarely use your card, increasing your card usage just for the bonus can be dangerous. You can easily wind up with more debt than you can manage. “The worst thing you can do is carry a balance on these cards because you’re subsidizing the rewards program for you and someone else,” Ulzheimer says.

And remember that there’s more to a credit card than just a sign-up bonus. You also need to understand the ongoing terms of the card before you apply. Consider the annual and monthly fees, annual percentage rate, penalty charges and any ongoing rewards, Gonzalez says. If you’re not careful, you could wind up paying more in fees and interest than you stand to earn in rewards.

“To the extent [initial perks] benefit you, that’s great,” Ulzheimer says. “But never lose sight of the fact that all of these perks are carefully designed and marketed for the purpose of pulling you in.”

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