2 Little-Known Dangers of Chasing Sign-Up Bonuses

Don’t make a decision you end up regretting.

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Key points

• Going after credit card sign-up bonuses can lead you to overspend.
• But that’s not the only pitfall you might encounter if you chase a sign-up bonus.
• You could lose out on an even better bonus, or hurt your chances of qualifying for a big loan like a mortgage.

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Credit card companies are good at getting consumers to sign up. And one tactic they tend to employ in their marketing efforts is the use of sign-up bonuses.

With a sign-up bonus, you usually get a lump sum pile of cash or reward points in exchange for meeting a certain spending threshold within a preset period of time. You might, for example, qualify for a sign-up bonus that gives you $200 cash back for spending $2,500 within three months of opening a new credit card account. Or, you might get air miles instead of cash, if the offer you’re signing up for is a travel rewards credit card.

The upside of chasing sign-up bonuses is simple — the bonuses themselves. But going after those offers could lead to a situation where you end up spending more than you normally would just to claim a great-sounding offer.

For example, if you normally incur $500 a month in credit card charges, that puts you at $1,500 of spending in three months. To claim an offer that requires $2,500 in spending, you might push yourself to spend an extra $1,000 during that time, thereby buying things you don’t need and running the risk of carrying a balance forward and racking up interest on it.

That’s the obvious danger of chasing sign-up bonuses. But here are two lesser-known issues that might arise if you go after a sign-up bonus.

1. You might miss out on a better sign-up bonus

You can generally only qualify for one credit card from the same issuer within a certain period of time. If you apply for a card with a sign-up bonus, you might miss out on the chance to claim an even better bonus a couple of months later. That’s why it pays to be judicious when chasing sign-up bonuses — and reserve your applications for those offers that are really lucrative.

2. You might lose out on a borrowing opportunity

Any time you apply for a new credit card, it results in a hard inquiry on your credit report. That will usually translate into a five- to 10-point drop in your credit score. But in some cases, that sort of drop could spell trouble.

Let’s say you’re on the cusp of being able to qualify for a mortgage based on your credit score. A five- or 10-point drop might push your score below the threshold for being able to get that loan.

What’s more, sometimes, a minor drop in your credit score could leave you with a less attractive interest rate when you’re taking out a loan. So even if you go after a sign-up bonus and it doesn’t result in a balance you’re forced to carry forward, you might still hurt your credit by virtue of applying for a new credit card.

Be careful with sign-up bonuses

Getting a credit card with a sign-up bonus is a great way to push cash in your pocket or score another nice reward. Just be careful to avoid these lesser-known pitfalls that could end up being really problematic.