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What a credit card sign-up bonus is and how you can benefit from one

CNBC Select defines credit card sign-up bonuses and how these welcome offers and the rewards that come with them can benefit new cardholders.

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Opening up a new credit card is a great way to build credit, and sometimes you can even be rewarded for doing so.

Many credit cards offer a welcome bonus, which means new cardholders earn extra rewards, such as cash back, points or miles, when they use their card. To earn the bonus, you usually have to reach a minimum spending requirement within the first few months of opening your account. The threshold varies, but it can be anywhere from $500 to $5,000.

Cash-back cards usually require the lowest minimum spend with the best return rates, while travel rewards cards typically offer larger bonuses for reaching higher spending limits. Then there are the few cards, like the Amazon Prime Rewards Visa Signature Card, which automatically awards you a welcome bonus of a $70 Amazon.com gift card upon account approval — no spending required.

Below, CNBC Select takes a look at what a credit card sign-up bonus is, how it works and how to benefit from one.

What is a credit card sign-up bonus?

You likely have seen a card issuer advertise welcome bonuses for their credit cards on their website or on mail offers you receive at home. They include language promising "bonus points" or a certain dollar amount of cash back when you sign up and spend on a certain credit card. These sign-up offers, also referred to as welcome bonuses, encourage you to open a credit card account and start using your card right away.

How do sign-up bonuses work?

The best credit cards offer alluring bonuses that can add hundreds back to your wallet, but you usually have to first spend money on your card in order to earn the bonus. On the bright side, this actually makes the bonus rewards you receive non-taxable income when it comes to doing your taxes since you had to earn them by spending money. Bonuses are considered a rebate, not a form of income.

In addition to requiring a minimum spend, welcome bonuses come with time requirement as well. Most cards require that you spend anywhere from $500 to $5,000, and it usually must be charged onto your card within the first three months (or 90 days) of your account opening.

After meeting the minimum spending requirement to earn your welcome bonus, how quickly the points or miles post to your account depends on the card issuer.

For example, with the Capital One® SavorOne® Cash Rewards Credit Card that lets new cardholders earn a one-time $150 cash bonus once spending $500 on purchases within the first three months from account opening, terms state that the cash back is applied "to your rewards balance within two billing cycles" once you qualify for the bonus.

With a travel rewards card, such as the Chase Sapphire Reserve® that offers 50,000 bonus points after new cardmembers spend $4,000 on purchases in the first three months from account opening (worth up to $750 toward travel when redeemed through Chase Ultimate Rewards®), the offer details state that "after qualifying, please allow six to eight weeks for bonus points to post to your account."

If you are planning on using your welcome bonus to buy a specific purchase or plan a trip somewhere, be sure to take these time requirements into account.

How to benefit from a sign-up bonus

Charging hundreds or thousands of dollars onto your credit card within a short period of time seems like an expensive way to earn rewards, but if you have a large purchase to make or an upcoming vacation to plan, a welcome bonus can actually come in handy.

For instance, one financial expert we spoke to met the minimum spend on her new credit cards by charging her and her husband's wedding rings and the cost of a small wedding. The couple then used the cash back she earned from welcome bonuses to help offset the cost of their honeymoon. Of course, you should take processing fees into consideration (some businesses charge 2% to 4% for credit card transactions), but if there are no extra fees this method can be quite helpful when financing large purchases like trips.

And once you do use your credit card to earn a welcome bonus, it's essential that you pay off any large balances quickly so you don't accrue interest that offsets the value.

Here's some math to show how quickly interest adds up:

If you were to meet the minimum spending requirement of $4,000 within the first three months on the Chase Sapphire Reserve®, you can earn 50,000 welcome bonus points. This equates to $750 towards travel when redeemed through the Chase Ultimate Rewards® portal. However, this value is almost negated entirely if you let that $4,000 balance sit unpaid for a year. The regular variable APR on this card ranges from 16.99% to 23.99%, and even with an interest rate on the lowest end at 16.99%, you would accrue $679.60 alone in interest on a $4,000 balance over 12 months. Because of the high interest credit cards charge, make sure you can pay off whatever you spend to earn the bonus.

Here are some of the top cards of CNBC Select's round-up of the best credit card welcome bonuses.

If you're interested in earning more rewards with a new credit card, consider one of the above that can help you make some extra cash when you spend.

Information about the TD Cash Credit Card, Capital One® SavorOne® Cash Rewards Credit Card, Capital One® Quicksilver® Cash Rewards Credit Card, and Amazon Prime Rewards Visa Signature Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.