When you’re offered a discount at the checkout counter in exchange for applying for a new retailer-branded credit card, it can be tempting, especially if you’re looking to defray big holiday gift expenses. But it’s not always the right choice.
Applying for a credit card can temporarily lower your credit score and place more stress on your finances, especially if you’re already carrying other credit card balances. After all, it’s one more bill to manage and one more card to potentially overspend on. The benefits might also be underwhelming after that first-time discount.
Despite those drawbacks, a survey by the credit bureau Experian recently found that about 1 in 4 consumers plan to open a new credit card this holiday season. Among those who plan to do so, 36% said they want to score store discounts; 35% said they want to maximize their rewards and cash-back earnings. More alarmingly, 1 in 5 said they were opening a new card because their other cards were maxed out.
If you’re considering opening a new credit card this season, here are some questions to ask yourself first.
1. Is it a good deal?
Evaluate the card fully. One-time, upfront discounts are good, but ongoing incentives are potentially much more valuable.
For example, Target REDcard™ Credit Card cardholders get a 5% discount on eligible Target purchases and extra time for returns. Those with the Amazon Prime Rewards Visa Signature Card earn 5% back at Amazon, among other rewards. The Capital One® Walmart Rewards™ Mastercard® earns 5% back on Walmart.com purchases and 2% back on in-store purchases, plus other rewards elsewhere.
“The holidays are a good time to open a new account if you do it carefully and wisely,” says Rod Griffin, Experian’s director of consumer education and awareness. “If you pick one or two retail stores where you get the best discounts and apply for their cards instantly, it can be a good strategy to save money — as long as you turn around and pay off that debt right away.”
General consumer cards not tied to particular stores also offer shopper-friendly rewards: The Discover it® Cash Back, for example, earns 5% in rotating bonus categories on up to $1,500 in spending each quarter (activation is required; all other purchases earn 1% back). And in the final quarter of 2019, those bonus categories are Amazon, Target and Walmart.com.
Beyond reward rates, also take into account a card’s fees, ongoing APR and difficulty of reward redemption. Make sure these aren’t deal breakers.
2. Do you pay your existing balances in full and on time?
Many Americans carry a balance on their credit cards from month to month, according to a recent NerdWallet survey. Interest rates on those ongoing balances can be costly, easily outstripping the value of any rewards or discounts, and adding a new card to the mix can exacerbate the problem.
“If you have balances that are too high or you have too many open credit accounts already, then it’s probably not a good idea to open a new one,” Griffin says.
Paying on time is also key. If you’re already having trouble juggling multiple due dates or habitually pay late (and incur late fees), then it’s probably not ideal to open yet another card that you’ll have to manage.
3. Do you stick to your budget?
For some people, credit cards — and especially rewards credit cards — can lead to overspending. If you decide to get a new card, make sure you have enough money in your checking or savings account to cover whatever you buy before interest kicks in.
If you know you’ll be tempted to blow your budget, skip the new card application and pay with cash or debit instead.
4. Do you already have the loans you need for the near future?
When you apply for a new credit card, it triggers a hard pull on your credit report, which can have a small, negative impact on your credit scores (such as a five-point drop) for up to a few months, Griffin says.
That means that if you’re also planning to apply for a mortgage or auto loan soon, you may want to protect your credit scores by avoiding applications for new credit accounts now.
The bottom line
If you answered “no” to more than one or two of these questions, it’s probably better to hold off on applying for any new cards, despite the temptation. But if you answered “yes” to all or most of them, a new card might be the right call. If you choose the best one for you, it can help stretch your budget, not just during the holidays, but throughout 2020 as well.