by Maurie Backman | Feb. 1, 2020
Credit card bonuses often seem like a great deal -- until they're not.
If you've ever applied for a credit card with a sign-up bonus, you know all too well how tempting it can be to go after that extra cash back (or whatever the incentive in question happens to be). But if you're not careful, your attempt to snag that bonus could wind up hurting you financially rather than helping you. Here are a few specific pitfalls you might encounter on the road to scoring the best bonuses out there.
Here's how sign-up bonuses typically work: You spend a certain amount of money within a set time period upon opening your credit card, and then you get some sort of special bonus in exchange. It sounds simple enough, but here's the problem: If you weren't planning to spend that money, and you can't afford to pay your balance by the time it comes due, you'll end up in debt. Once that happens, you'll start wasting money on interest, your credit score will take a hit, and it will be harder for you to borrow money affordably the next time you really need to.
Imagine you're approved for a credit card that will give you a $500 cash-back bonus if you spend $3,000 within your first three months of opening it. If you don't have $3,000 worth of charges to accrue, you'll likely push yourself to buy things for the sake of getting that free $500. But let's say you do spend the $3,000, you get your $500 back, but then you can only afford to pay off $1,500 of your bill. Suddenly, instead of being $500 richer, you're $1,500 in debt. Talk about counterproductive.
Credit cards with sign-up bonuses don't always charge expensive annual fees -- but some do. And here's how that might shake out: You sign up for a card with a generous bonus and justify the associated fee because it is outweighed by the cash back you get. But what happens when you wind up hanging onto that card because you're used to it, or too lazy to apply for another? At that point, you're stuck paying that fee for no good reason, especially if the rewards program associated with that card isn't enough to make up for the cost.
Each time you apply for a new credit card, it counts as a hard inquiry on your credit report. Too many hard inquiries can lower your credit score, and once that happens, it becomes more difficult to borrow money when you need to. If you go too crazy applying for new cards to snag sign-up bonuses, you'll risk hurting your credit. That will decrease your chances of getting approved for cards with the best offers in the future.
One thing you should note, however, is that new credit accounts only comprise a small portion of your credit score. Areas like payment history, credit utilization, and length of credit history carry more weight in the calculation. If you're strong in these, your score may not take too bad a hit when you apply for several cards with sign-up bonuses in a relatively short time frame. But you might still fall victim to the aforementioned traps.
Sign-up bonuses often seem like a good deal. And if you need a new credit card, or you're convinced you'll be able to affordably spend enough to snag the bonus that's caught your eye, then by all means, apply. Just don't make the mistake of racking up debt in order to get the bonus, resigning yourself to costly annual fees, or hurting your credit if it's already in iffy shape.
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