Applying for a new credit card before the holidays could be a smart move – or a costly mistake.
Even if you already have a couple of credit cards, you may be tempted by the right credit card offer to apply for a new card before the holidays. After all, if you can earn rewards or a big sign-up bonus by charging your holiday shopping to the new card, why not apply?
In some cases, getting a new credit card to earn rewards or applying for one with a low-interest rate before the holidays can be a good idea. At the same time, what seems like a smart financial plan could backfire, leaving you with more debt than you can afford.
Here are the pros and cons of getting a new credit card for holiday shopping.
Pro: You could receive a sweet sign-up bonus
If you have good-to-excellent credit, you might be approved for a new credit card that offers a sign-up bonus. This type of offer typically requires you to charge anywhere from $500 to $5,000 on the card within three months after opening the account. Once you achieve that amount, you’ll receive a bonus ranging from $100 to as much as several hundred dollars, depending on the offer terms.
For example, you might have to charge $3,000 in 90 days for a card with a $500 sign-up bonus. Once you hit that amount, though, you can apply that bonus to your credit card balance, essentially saving $500.
Con: You might run up too much debt
Even a lucrative sign-up bonus can have a downside. If it takes months or years to pay off your holiday shopping balance, the amount you’ll pay in interest will cancel out and probably even exceed any bonus received. To avoid that scenario, only apply for a card with a required transaction amount that you can afford and then pay off the statement balance each month.
Pro: You can finance a large purchase with a 0% APR
Are you planning to purchase an expensive gift this holiday season? Or maybe you have a big purchase in mind for yourself and want to cash in on holiday sale prices. If so, applying for a credit card with a 0% promotional APR that lasts anywhere from six months to two years can be a good way to make that happen. That way, you can make payments over time without paying any interest.
Con: You could pay big if you pay late
Just as a 0% APR card can work in your favor, the terms for promotional APR offers typically come with a couple of strings that could tie up your finances later.
For example, if it’s a retail store card and you don’t pay off the balance by the end of the promotional period, you may have to pay retroactive interest on the full amount. If you pay late on a retail or major credit card with a promotional APR, the issuer may even cancel the promotion, bumping the interest rate on the card to a significantly higher amount.
Pro: Holiday shopping can rack up rewards
Charging holiday shopping to a new card with a generous rewards program can pay off, but only if you can pay off the balance quickly. For example, you can use your cash back rewards to knock down the balance to save on holiday spending. Or you can save on vacation later with the travel rewards. Be careful not to go overboard, though.
Overspending to earn rewards points could mean you’ll pay a lot in interest if you can’t pay the balance off fast. To avoid paying interest on a balance it takes months or years to get rid of, create a budget for holiday shopping, with a maximum amount you can afford to charge on the card and pay off with the next statement.
Now that you know some of the pros and cons of getting a new credit card before the holidays, take a look at your current credit card balances. If they’re not at zero, you may want to hold off on a new card and focus on paying down those cards. But if you’re disciplined enough to pay off a new credit card while reaping the benefits of its rewards and low-interest rate, a new credit card could be just what you need for your holiday shopping.
Con: New credit can lower your credit score
Did you know credit inquiries account for 10% of your credit score? So just applying for a new card may knock your score down a few points, but it’s only temporary. You do want to be careful if you have recently opened an account or applied for more than one new line of credit in the past 12 months. This new account will also affect your length of history, 15% of your score, by lowering the average time you’ve held accounts. On the good side, new credit will increase your credit utilization, which makes up 30% of your score. If you don’t have any credit cards your credit mix, 10% of your score, will benefit as well.
Read more: Understanding Your Credit Score
Talk to a debt relief specialist to find the best way to pay off credit card debt.
Published by Debt.com, LLC