2 Little-Known Dangers of Chasing Sign-Up Bonuses

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  • Going after credit card sign-up bonuses can lead you to overspend.
  • But that's not the only pitfall you might encounter if you chase a sign-up bonus.
  • You could lose out on an even better bonus, or hurt your chances of qualifying for a big loan like a mortgage.

Don't make a decision you end up regretting.

Credit card companies are good at getting consumers to sign up. And one tactic they tend to employ in their marketing efforts is the use of sign-up bonuses.

With a sign-up bonus, you usually get a lump sum pile of cash or reward points in exchange for meeting a certain spending threshold within a preset period of time. You might, for example, qualify for a sign-up bonus that gives you $200 cash back for spending $2,500 within three months of opening a new credit card account. Or, you might get air miles instead of cash, if the offer you're signing up for is a travel rewards credit card.

The upside of chasing sign-up bonuses is simple -- the bonuses themselves. But going after those offers could lead to a situation where you end up spending more than you normally would just to claim a great-sounding offer.

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For example, if you normally incur $500 a month in credit card charges, that puts you at $1,500 of spending in three months. To claim an offer that requires $2,500 in spending, you might push yourself to spend an extra $1,000 during that time, thereby buying things you don't need and running the risk of carrying a balance forward and racking up interest on it.

That's the obvious danger of chasing sign-up bonuses. But here are two lesser-known issues that might arise if you go after a sign-up bonus.

1. You might miss out on a better sign-up bonus

You can 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 -- and reserve your applications for those offers that are really lucrative.

2. You might lose out on a borrowing opportunity

Any time you apply for a new credit card, it results in a hard inquiry on your credit report. That will usually translate into a five- to 10-point drop in your credit score. But in some cases, that sort of drop could spell trouble.

Let's say you're on the cusp of being able to qualify for a mortgage based on your credit score. A five- or 10-point drop might push your score below the threshold for being able to get that loan.

What's more, sometimes, a minor drop in your credit score could leave you with a less attractive interest rate when you're taking out a loan. So even if you go after 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.

Be careful with sign-up bonuses

Getting a credit card with a sign-up bonus is a great way to push cash in your pocket or score another nice reward. Just be careful to avoid these lesser-known pitfalls that could end up being really problematic.

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