With the holiday shopping season approaching, it seems like you can’t go into a grocery store or a bank, or shop online, without a financial institution offering you a credit card. Often the pitch sounds like this: Sign up for a new card now, and you can earn points, get cash back or score a huge discount on your next purchase.
But at time of soaring inflation, high interest rates and fears of a recession, should consumers bite? There’s no doubt that having another credit card will lead to more spending, so if you’re already struggling with debt or in a precarious financial position, don’t. If your finances are under control and you plan to shop responsibly this holiday season, the welcome offers can be beneficial – as long as you look out for these red flags.
Pay attention to the details
Traditionally, credit card welcome offers are given after you meet a minimum spending requirement. However, tiered bonuses have become more common of late. That’s where you need to spend a set amount each month or within six to 12 months to get the full bonus. Part of the offer may also only be given on your card anniversary – when your second year’s annual fee kicks in.
These structured bonuses are designed to get you to spend significantly more. Also, if you miss the minimum spending requirement by even a dollar, you won’t get the bonus at all, so many people end up spending more than what’s necessary to ensure they don’t miss out on their offer. If you’re spending more just for the sake of getting extra points or cash back, it’s likely not worth it.
You could reduce debt or pick up more
Some credit cards are advertised as a way to save you money. For example, the Scotiabank Value Visa Card has an annual fee of $29 – waived for the first year – but offers 0 per cent interest for 10 months on balance transfers. That’s where you transfer an existing balance on a different credit card with a higher interest rate to your new Scotiabank card. Once the promotional period ends, the interest rate goes up to 12.99 per cent.
Although a 1 per cent balance transfer fee applies, that’s considerably lower than the standard interest rate of 20 per cent or more that most credit cards charge. It’s even lower than what banks are currently offering for a line of credit.
While it’s possible to reduce how much interest you’re paying by focusing on your debt during the promotional period, you’re still getting access to more credit when you apply for a balance transfer credit card. If you don’t pay down your balance or you incur additional charges, you’ll just end up with more debt.
Your credit score will drop
Despite the generous welcome bonuses offered, one thing is for sure: Your credit score will drop when you apply for a new card. That’s because a hard inquiry will be performed on your credit history during the application process.
Although your credit score will only drop a few points and will likely recover after a few months if you make your payments on time, it’s still another hit to your credit. This could be problematic if you’re applying for a loan in the future, such as a mortgage, as lenders may wonder why you recently applied for more credit.
Some offers still make sense
If you’re the type of person who always pays off their bills in full each month and you don’t spend more than you normally would, then signing up for a new credit card could be worth it. This is especially true during the holidays, when many people typically spend more.
For example, the WestJet RBC World Elite Mastercard currently has a welcome bonus worth up to 700 WestJet dollars. You’ll get 300 WestJet dollars after your first purchase, another 300 WestJet dollars when you spend $5,000 in the first three months, and a one-time anniversary bonus of 100 WestJet dollars. If you were planning to spend that amount anyway, you can reap the rewards from the welcome offer.
Even if you don’t spend a lot, you can rack up those points. The CIBC Aeroplan Visa Card has no annual fee, and you get 10,000 Aeroplan points after your first purchase. For context, that’s enough points for a one-way flight from Vancouver to Los Angeles, Calgary to Toronto, or Montreal to New York. The value of those flights is a few hundred dollars each, but it would have cost you nearly nothing to get the points.
Admittedly, these offers can be great, but they’re one-time deals. Once you’ve received the incentive, it’s just another card in your wallet. If the card has an annual fee, you need to factor that into your decision making or cancel the card before the yearly fee posts again in 12 months.
There’s no denying that credit card welcome bonuses can be lucrative, but the reality is that any rewards you earn aren’t worth any interest payments, so paying your bills in full each month is essential.
Barry Choi is a personal finance and travel expert at moneywehave.com. He was previously affiliated with Aeroplan, WestJet, and Tangerine but currently has no relationship with any of the brands.