It’s tempting to apply for a credit card when the bank is dangling a really great bonus in front of you. Qualify for the new card and you’ll get $100, $200, $300 cash or an extra 10,000 or 20,000 airline points.
But before you take the bait, make sure that the signup bonus is really worth it by asking these questions:
The issuing banks don’t automatically give you the bonus when they send you the credit card. You have to spend a specified amount within a limited period (usually 90 days) to receive the signup points or cash back.
The bigger the bonus, the more you’ll usually have to spend to earn it. One card on the CreditCardXpo site offers a signup bonus of 40,000 extra points (equal to $400 cash). But to get it you have to charge $3,000 in purchases in the first three months. Do you normally charge $1,000 a month on your credit card? Can you afford to do that?
Consider whether you’ll have sufficient funds or sufficient willpower to put aside money to pay off the bill each month. If you carry a balance and end up paying interest, you are, in effect, reducing the value of the signup bonus.
Some bonus signup cards carry annual fees. The card company may waive the fee for the first year but is it worth getting the signup bonus this year if next year (and for all the years you have the account) you’ll have to pay for carrying the card?
The answer could be yes, if the signup bonus or the ongoing rewards are really good. But if you’re getting just $100 now and you’ll have to pay $50 a year after that, it’s not too long before the cost of the card outweighs that initial benefit.
Some people can apply for a credit card, spend enough to get the initial bonus and then use it sparingly or not at all. Others will take a new credit card and make purchases they really can’t afford, digging themselves deeper and deeper into debt. If you already have trouble controlling your spending, getting another card isn’t a good idea, no matter how good the upfront bonus.
You might consider opening a credit card account, doing whatever’s necessary to earn the bonus and then closing the account. While that may reduce the temptation to overspend, in the long run it won’t do your credit score any good. Credit scorers don’t like it when you close accounts, and they don’t like it when too much of your credit is new. Since a lower credit score may end up costing you more long term in higher interest rates, this isn’t a great strategy.
Bottom line: Credit card signup bonuses can be an excellent way to acquire points or get some extra cash. Just be aware of all the ways getting that signup bonus card could affect you.