Dubai: It’s always considered a bonus to get freebies back with your credit card purchases, but such so-called freebies like sign-up bonuses, reward points or cashbacks often come with a costly catch. This is why new credit card holders need to know how the ‘minimum spend’ requirement works.
Minimum spend is one of the common conditions used by credit cards when offering sign-up bonuses and other incentives. It requires new credit card customers to reach a certain level of spending in order to qualify for the advertised bonus.
“With a sign-up bonus, you get a cash reward for signing up for the credit card, provided you spend a minimum amount in a period of time, such as spending Dh5,000 or more within the first three months of opening the account,” explained Essam Kabeelali, a UAE-based consumer credit advisor.
“If you're a savvy operator and are sure the value of the sign-up bonus is worth more in the long run than what you'll be paying in fees, and if you were planning on signing up for a credit card already, then you may decide that the bonus is worth it.”
If you're a savvy operator and are sure the value of the sign-up bonus is worth more in the long run than what you'll be paying in fees, and if you were planning on signing up for a credit card already, then you may decide that the bonus is worth it
Not always good to get credit cards with sign-up bonuses
So is it bad to get credit cards for the sign-up bonus? While it is not necessarily bad in a direct sense, it can be costly and impractical. With careful use, credit cards with a sign-up bonus can help you accumulate rewards, but that’s not always the case.
“If your regular credit card spending is enough to comfortably meet the minimum requirement within the promotional period, you don't need to worry. But if the threshold is more than you usually spend, overspending for the sake of a sign-up bonus could negate its value,” added Kabeelali.
“If you’re planning to use the card for your everyday purchases, you’ll likely get more value in the long run from continuing rewards. Consider how much you’re actually spending and what categories you’re going to be rewarded in and do the math in terms of what value can come out of the card.”
So as you compare credit cards, take a look at your spending habits, particularly in which categories you spend a lot. Rewards cards may offer extra rewards on groceries, dining out, travel, fuel or any other number of categories, or they may offer a flat rate on all of your purchases.
“You generally only qualify for one credit card from the same issuer within a certain period of time. If you apply for a card with a sign-up bonus, you might miss out on the chance to claim an even better bonus a couple of months later. That's why it pays to be judicious when chasing sign-up bonuses.”
For example, if you normally incur Dh500 a month in credit card charges, that puts you at Dh1,500 of spending in three months. To claim an offer that requires Dh2,500 in spending, you might push yourself to spend an extra Dh1,000 during that time, thereby buying things you don't need.
You then run the risk of carrying a balance forward and racking interest. But even if you go for a sign-up bonus and it doesn't result in a balance you're forced to carry forward, you might still hurt your credit by virtue of applying for a new credit card as your credit score naturally drops when you do.
How to make the most of a credit card with a sign-up bonus?
“Before you get that next credit card, it’s key to try and time your sign up when you have a lot of upcoming expenses. But if you’re still having difficulties meeting the minimum spending requirements, there are workarounds,” said Rajesh Markara, another Abu Dhabi-based debt advisor.
“On a daily basis, you may make one or more small purchases. Even though these purchases are small, they can quickly add up over time. So the best strategy to follow is to eliminate all other cards from your wallet while you are working towards the minimum spend threshold.”
According to Markara, one way to make the most of a credit card with a sign-up bonus is with ‘manufactured spending’. “It is a technique of maximising credit card spend to earn rewards while minimising the adverse effect on your bank account balance,” he added.
“‘Manufactured spending’ can be used for meeting minimum spend requirements on your credit card or just racking up frequent flyer miles at an airline or hotel.” Here’s an example of when ‘manufactured spending’ comes of use when making use of credit card sign-up bonuses.
Assuming you typically spend Dh200 per month on groceries, and half of your grocery bill (Dh100) covers non-perishable items, as non-perishables have a long shelf life and can be bought ahead of time, this is how you go about using ‘manufactured spending’ to your advantage.
You purchase nine extra months of non-perishable items over the next three months, which increases you grocery expenses in that time period by Dh900 (Dh100 multiplied by 9 months), adding to your 3-month spending of Dh4,500 on the new credit card to Dh5,400.
This surpasses the minimum spending requirement of Dh5,000 and qualifies you for the Dh750 bonus. This is when ‘manufactured spending’ can help when making use of sign-up bonuses on your credit card.
When signing up for a new credit card, the sign-up bonus is typically the most valuable benefit of the card in the first year — so it's important to meet the threshold within the allotted time period. But it's just as vital to not make purchases you wouldn't normally make to simply meet the bonus offer.
This is because sign-up bonuses can lead to overspending by giving you the incentive to meet minimum spending limits in a short time. “If you have to carry a balance to get the sign-up bonus, you'd better be able to pay it off quickly to make the sign-up bonus worthwhile,” added Kabeelali.
“Never spend more than you can afford to pay off at the end of each billing cycle and make your payments on time every month. You'll get double benefits – cash back without any interest charges and a high credit score that reflects your responsible use of credit.”
So while there are umpteen of ways to meet this minimum spend requirement, be sure that the reward is worth the minimum spend, and that you can pay off the resulting balance on your credit card before interest charges start adding up.