Editorial Policy

When a sign-up bonus is too costly

Eva Norlyk Smith Ph.D.

August 26, 2013

QDear Eva,

I want to get a Citi AAdvantage card that gives 40,000 miles if you spend $3,000 in the first three months. I also have a card that will let me make a balance transfer onto it and pay no interest for 12 months. Since I don't have enough money on hand to pay off the $3,000, I'll need to spend to get the free miles. I'm thinking of spending $3,000 and then transferring it to my other card so I can pay it off over a year. I'd have to pay 3 percent of the balance I transfer as a fee. Do you think this is a good idea? Those miles would help a lot in getting me home for the holidays this year. — Kyra

AHi Kyra,

Rewards card sign-up bonuses have a curious magic: All those zeros just make it sound like you're getting an amazing deal! But if you take a moment to convert that bonus into dollars and cents, you might see that it's not quite as staggering a bargain after all.Ask Eva

What's particularly troubling about this offer is that you have to spend $3,000 to earn that 40,000 miles rewards bonus. There are times it makes sense to spend to save money, but for the most part, it is a dangerous proposition, particularly when it involves spending money you don't have and that you weren't planning to spend in the first place.

Pair a sign-up bonus with a balance transfer, and you're asking for even more potential trouble. Let's say you experience an expensive life event (such as a job loss). You'll find yourself with $3,000 to pay off and no way to do it. If you can't pay off the $3,000 in a year, the interest rate on that balance will jump, canceling out the worth of any rewards you've earned.

Even if you do everything right, those points may not be worth as much as you think. Let's take a moment and look at what you're actually getting with that 40,000-mile bonus. The standard rule of thumb is that 1 mile is the equivalent of 1 cent. It may be more, or less, depending on how you redeem the miles, but on average, that's the value most people end up with.

At that rate, the 40,000 miles are worth about $400. Subtract the balance transfer fee of $90 (3 percent of $3,000), plus a $95 annual fee if you keep the card longer than a year. That leaves you with $215 in value. Even if you decide to cancel the card before the annual fee kicks in, the value of the rewards would still only be around $310.

If you were already planning to spend $3,000 on some project and had the money on hand, it would be a different story. But taking out a balance transfer and spending $3,000 just to earn $200 to $300 in rewards just seems like a terribly roundabout way to save money. In fact, if you simply put aside the money you'd otherwise be spending each month to pay back the $3,000 balance transfer, perhaps you could afford the trip on your own.

If you do like the idea of getting reward miles, you could look for rewards cards with less onerous spending requirements. Here are a few other rewards cards offers to consider:

US Airways Premier World MasterCard:
30,000 miles after your first purchase or balance transfer.

Spending requirement: $0

The US Airways card features no minimum spending requirement. All you have to do is make a purchase. The card does feature an $89 annual fee, however, which is not waived the first year — but that fee would still be less than your balance transfer fee, plus you wouldn't have to worry about spending $3,000.

Gold Delta SkyMiles card from American Express:
30,000 miles.

Spending requirement: $500

The Delta SkyMiles card's 30,000 miles bonus is enough for one free round-trip ticket on many routes. Like most airline miles credit cards, the card features a $95 annual fee, waived the first year.

Citi Gold/AAdvantage World MasterCard
25,000 miles.

Spending requirement: $750

There are many different iterations of the Citi AAdvantage card. This one has a much lower sign-up bonus and a much more manageable spending threshold. It's still not ideal, but if you prefer AAdvantage miles, this may be a better offer. American Airlines start frequent flier tickets at 25,000 miles, so you might still have enough for a ticket.

If you do go for a rewards card with a spending requirement, read up on ways to meet it without actually spending money you wouldn't otherwise have spent. Good luck!

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