It can be tempting to open a new credit card when the sign up bonus is sweet enough–and as a former financial services marketer I can tell you that banks and credit issuers spend a boatload of money determining exactly how big the carrot they dangle needs to be to get your attention. But, as CardHub’s 2014 Credit Card Landscape Report reveals, a big credit card promotion doesn’t come without some strings attached; the only way it’s really a “good” deal is to know the implications of what the card could potentially cost–even if you intend to pay the balance in full.
Though CardHub’s data indicates that sign up bonuses for credit card rewards have become more lucrative of late (the value of the average cash and points/miles-based bonuses increasing 15.5% and 10.04%, respectively on a year-over-year basis) the interest rates on credit cards have risen an average of 2.12% on a year-over-year basis across the board, too.
Clearly, an easy way to gauge the value of the sign up bonus is to know whether you’ll carry a balance and accrue any interest rate charges, but there are additional considerations to keep in mind, too.
For example, if you’ve recently opened other new credit cards, or even applied for new lines of credit, you could actually hinder your own credit score–both by having too many new accounts, and too many inquiries into your credit.
If you’re in the midst of a applying for a new mortgage loan or refinance in the next several months, you’ll want to avoid jumping on that new credit offer, too. Even if you open the card for the sole purpose of scoring some free bonus miles to offset the costs of upcoming travel, it essentially signals to lenders that you’re hard up for cash–even if you’re not.
On the other hand, the credit card bonus offer may indeed be a reward–if you meet the following conditions:
–You know you have no intentions of applying for a new loan of any kind in the next year (meaning, a slight dip in your credit score doesn’t matter)
–You know you can pay the balance in full by the statement close date (which is usually about 3 weeks early than the statement due date). This way, you’ll get the benefit of the line of credit on your credit history–but the balance will always be reported to the credit bureaus as $0.
–You don’t have too many other credit cards. There’s alot of debate around the perfect number of credit cards a person can have, but for the sake of argument, let’s turn to the advice of my colleague and credit expert John Ulzheimer, who puts the number at five. With that said, keep in mind that doesn’t mean five cards in your wallet–that means, five credit cards total. You don’t want to close accounts that you’ve had for a long time, because they’re an important factor in having good credit.
