From thousands of points to generous cash-back offers, credit cards are always angling to entice new customers to sign up for their product. For some consumers, these bonuses may as well be free money. But for others, they may be less lucrative than they appear.
When evaluating whether a credit card sign-up bonus is worth it, you need to take two key factors into consideration: the value of the bonus and your average credit card spending.
Generally, credit card points are worth about 1 cent each, although that can change depending on how you redeem them. They might be worth slightly more if you use them at an airline or retailer that your credit card company has a partnership with, but if you exchange them for cash or statement credit, the point-to-penny ratio is typically 1:1.
That means that a 50,000-point welcome bonus is worth around $500, while a 15,000-point bonus is worth about $150. If the bonus is simply in the form of a statement credit, no math is necessary.
Once you know the cash value of the bonus offer, it's time to figure out if it will actually be worthwhile. Credit cards that offer large sign-up bonuses normally tie them to minimum spend requirements. A credit card may entice a customer to sign up for its latest card with a 50,000-point bonus offer, but that offer is contingent on the customer spending $3,000 on the card over the next three months.
To determine whether the 50,000-point bonus is worth it, you'll need to figure out your average monthly spending. Do this by looking at your past credit card or bank statements. If you are already spending $1,000 per month, then you won't have any trouble hitting the minimum.
But if you spend an average of $700 per month, you'd need to spend an extra $900 during those next three months to hit $3,000. If you don't have a large purchase you need to make that you could put on the card, you would effectively be spending $900 for $500 worth of points, leaving you with $400 less than when you signed up.
"You don't want the lure of some of these offers to detract and harm your ability to save," Amy Richardson, a certified financial planer at Schwab, tells CNBC Make It. "It's a little bit of a game. You want to win, you don't want the credit card companies to win."
Credit card users who can't pay off their balance in full each month should likely avoid exciting bonus offers because of the additional strain it will put on their finances, Richardson adds.
"If you are going to spend more and not be able to pay off your balance [in full], it really is counterproductive and detrimental," she says. "Once you start paying interest, the value of those bonus points and that cash back is diminished."
Some credit cards may have a generous sign-up bonus, but also charge an annual fee. If a credit card has a sign-up bonus worth $300, but an annual fee of $95, make sure you don't need to alter your spending by more than $205 in order to get the reward. You should also consider if the card's other perks are worth the annual fee going forward.
No matter how tantalizing a sign-up bonus may appear, if you need to greatly increase your spending to reach it, the credit card probably isn't worth it for you.