While searching for an airfare from Kansas City, MO, to San Diego, CA, last week, an airline credit card offer appeared on my screen. I’d already nabbed a $269 airfare. Now I could save even more.
If I signed up for the airline’s rewards credit card, I’d receive a $200 credit on my first statement. That’s a sweet deal. Or was it? I opened the card’s terms and conditions and “offer details” to find out.
The first thing I noticed is the credit card’s annual fee of $69, which gets added to the first statement. So right away, my savings dropped. But then I saw that I’d earn 10,000 points after spending $500 in the first three months. I spend that much anyway. Those points could buy another ticket later.
But how would I feel next year, when that annual fee showed up on my credit card statement? Would that yearly charge offset my savings? While a credit card’s annual fee may be worth it for frequent business travelers or those who spend thousands a month on dining, groceries and everything else, it’s generally not worth it to me.
That’s because I usually pay cash for groceries and daily expenses. I use my current rewards card for utilities, insurance and other recurring payments, accruing rewards slowly. Would another rewards card be worth it, especially one with a $69 annual fee?
Two months earlier, I’d opened a Best Buy card, even though I knew I’d never use the high-interest card again, to take advantage of an offer that gave me back $70 in rewards on a laptop. Then I paid the balance off right away. Now I wanted to open yet another credit card account. Still, I had my doubts.
Maybe, like me, you’re tempted to take advantage of the many credit card sign-up bonuses out there. However, before you apply, consider a few factors that can affect your credit score and budget.
You can have too many new credit cards
Applying for several credit cards over a few months can lower your credit score. That’s because each time you apply, the company checks your credit, which counts as a “hard inquiry.” A hard inquiry can lower your score by a few points, unlike a “soft inquiry,” which occurs when you request a copy of your credit report or a creditor pulls your report before sending a promotional offer.
Tip: Hard inquiries have a greater impact if you have only a few accounts or a short credit history, according to Fair Isaac Corporation (FICO).
Weigh any bonus against the cost
If a credit card offer requires you to purchase a specific amount within the first few months, be careful. If you can’t pay the balance every month, you could pay more in interest than you saved with the initial offer. Also, take a close look at the offer details. Even though I received $70 in rewards on my laptop, I didn’t know that I could only redeem them with purchases at Best Buy and that they expired a month later. When I couldn’t find anything for under $70 before the rewards expired, I applied them toward purchasing a Fit Bit for $130, canceling out my savings.
Tip: Before applying, read credit card terms and conditions and special offer details closely.
How’s your financial self-discipline?
Credit card companies don’t offer sign-up bonuses and statement credits because they want to make you happy. They’re betting that you won’t pay the balance monthly, and they’ll eventually get their bonus back, with interest.
Tip: Before you sign up for any credit card offer, make sure you’ve got a long record of paying off your monthly balances.
After weighing the annual fee against my airfare savings and potential points, I applied for the card. On my first statement, I owed $110 total for the annual fee and what remained of the $260 airfare. I already have enough points for another ticket, and if I pay my usual monthly bills with the card, can earn points toward another airfare.
The key to my decision: I plan to pay off the balance monthly to avoid paying interest. Also, I have a long, solid credit history, so even if I lose a few points temporarily from two hard inquiries in two months, that won’t be a problem.
The card also offers 3,000 anniversary points to entice me next year. Will I keep the card and its pesky annual fee? We’ll see. Meanwhile, I’ll put the money I saved on airfare toward a hotel that’s closer to the beach.
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