Walk through an airport, step into a bank or just fire up your browser and you’ll likely be met with alluring offers for credit cards with seemingly too-good-to-be-true bonuses. Thousands of points over here! Hundreds of cash-back dollars over there!
It can be tempting to rush right into these limited-time promotions without looking at the big picture. Some enticing offers may be a great choice for you, but others could be a raw deal.
Here are some tips to help you decide whether a credit card bonus is worth it.
The rule of three
When it comes to credit card bonuses, NerdWallet recommends following the "rule of three." Unless the card has especially valuable rewards or benefits, aim for a sign-up bonus value that's equal to three years or more of the card's annual fee.
If, for example, a new card you’re eyeing comes with a $95 annual fee (one that's not waived in the first year), the sign-up bonus should be worth at least $285.
If the credit card is offering a cash-back bonus, it’s easy to do that math, especially since annual fees are less common among cash-back cards in the first place.
“Aim for a sign-up bonus value that's equal to three years or more of the card's annual fee.”
But when the card comes with an eye-popping pile of points, it can be difficult to determine how much the bonus is actually worth. That's because all credit card points and miles aren't created equal; the values can differ widely depending on the rewards program, what you redeem for and how you do it.
Generally, you'll want points that are valued at least at the industry standard of a penny each. But that's not a hard-and-fast rule, especially when it comes to airline miles and hotel points. For example, NerdWallet values Hilton Honors points at about half-a-cent each — so the individual value isn't great. But on the other hand, Hilton credit cards tend to offer bonuses that make up for that relatively low value in sheer number of points. That is, while the point value is low, you get more of them, so it can be a wash.
In other cases, the value of a mile or point hinges on your redemption choice. Capital One miles, for instance, are worth a flat 1 cent apiece when redeemed for travel, but only half-a-penny per mile when redeemed for cash back.
Chase Ultimate Rewards® points are worth 1 cent each when redeemed for cash back, but are worth 1.25 cents each for Chase Sapphire Preferred® Card customers who redeem them for travel through Chase's portal. Further, if you choose to transfer Ultimate Rewards® points to one of Chase's travel partners, they could have a higher or lower value.
So when you’re considering a new credit card offer, determine first how much the bonus points are tangibly worth and see how much of the annual fee they will effectively cover. Thinking of points in terms of currency — which is what they are — will help you mentally attach value to them, as opposed to spending them with abandon because they don’t feel like "real" money.
More than just math
When you’re considering the value of points and miles, there’s more to the equation than just math. There's practicality, too.
Let’s say you’re planning a big trip and see an offer for the Southwest Rapid Rewards® Plus Credit Card. The current deal looks exciting: Earn 40,000 points after you spend $1,000 on purchases in the first 3 months. Plus, earn 3X points on dining, including takeout and eligible delivery services, for the first year.
Just one problem: You’re looking to travel to Europe, and Southwest Airlines only serves destinations in the U.S., Mexico, Central America and the Caribbean.
Before applying for a card, consider whether the airline with the nice credit card bonus services your local airport. If you’d have to drive hours out of your way to catch flights, is it really worth it? Does the hotel chain with the enticing welcome offer have properties that you’d like to visit? If your points end up sitting in an account that never gets used, they don’t have any actual value.
On the other hand, the credit card may also offer intangible perks that will be beneficial to some and useless for others. Some cards, like the United℠ Explorer Card, offer priority boarding on your flight. Other cards offer lounge access at the airport that lets you enjoy snacks (or even full-on meals) in plush seats before you embark on your journey. It’s hard to put a price tag on these benefits, but if you’ll use them several times, it could make the card more valuable to you.
Three more key factors to consider
Here are a few other questions to think through when you’re signing up to get a new card that earns points or miles:
Can I hit the minimum spending requirement? Most credit card offers come with some strings attached. To qualify for the sign-up bonus, you typically need to spend a certain amount of money on the new card in a given time. Sometimes these requirements can be pretty steep. If your normal spending patterns don’t add up and you don’t have any large purchases on the horizon, opening a new card for the bonus isn’t a good idea.
How many points will I need to redeem? You’ve done the math and figured out the probable value of the points you’ll be earning, and compared that number with the three-year costs of the annual fee. But there’s another critical factor to know before you jump in. If you’re eyeing a luxury hotel for your anniversary trip, look at the program’s award chart first. Some programs charge the same amount of points all the time, while others charge a wide range of points for the same room depending on the dates you plan to visit.
When will the points expire? Many credit card points and miles programs have generous expiration policies, but others not so much. Some never expire — but with the important caveat that you must have some activity in the account within a certain period of time. Others may expire in a given timeframe from when you earned them, even with some account activity. Take some time to do a little research before you take the plunge on the exciting offer.