Holiday credit card perks come with pitfalls

NEW YORK – It seems like the most wonderful time of year for credit card rewards.

With the holiday season fast approaching, card issuers are dangling big sign-on bonuses and richer rewards that they say will help consumers offset their spending sprees. But the incentives could backfire by nudging you to rack up more charges than you intended.

In other cases, the fine print may mean you won’t qualify for the promised savings.

That’s not to say you should resist all deals, which are plentiful this time of year. But the key is to go in with your eyes wide open.

For example, Discover is touting the 5 percent cash back its cardholders can earn on purchases at department stores and restaurants throughout the holiday season. For those in the market for a new card, the Chase Sapphire Preferred card offers sign-on bonus points worth $625 in airfare or hotel accommodations.

Retailers are getting into the act too, promising extra savings on their store credit cards. But as enticing as those deals may sound, they all come with fine print that could sabotage the savings you’re banking on.

If you’re strategizing for the holidays, here are four credit card pitfalls to watch:

The lure of the sign-on bonus

When you know you’re about to hit the gas on spending, it makes sense to see if there are sign-on bonuses you can capitalize on.

The catch is that you will likely have to meet some conditions before cashing in. With the Chase Sapphire Preferred card, for example, cardholders need to spend $3,000 in the first three months after the card account is opened to qualify for the bonus.

In other cases, airline-branded cards may promise new customers enough miles for a free domestic ticket. But those customers will still need to pay the fees and taxes for the ticket, which can amount to several hundred dollars.

So if a promotion catches your eye, be sure to ask what you need to do to earn the advertised bonus.

You also want to be careful not to let the bonus blind you of the card’s other terms. Even if it has a generous rewards program, a hefty annual fee might negate its value if you don’t typically charge a lot on your credit cards. If you tend to carry a balance, you’re probably better off with a card with a lower interest rate.

Failing to consider credit score

In the excitement of opening a new card, it’s easy to forget the impact a new account can have on your credit score.

A new line of credit could ding scores by as much as 25 points, according to Barry Paperno, consumer affairs manager for FICO, which develops the most widely used credit scores. That’s based on a range from 300 to those with poor credit to 850 for those with excellent credit.

The exact impact will vary depending on other factors in the individual’s profile. For instance, it might not be as severe for those with excellent credit who haven’t opened a new card in several years, Paperno notes.

Scores typically recover from new account openings after about three to six months, assuming you make payments on time and don’t open any other accounts. So if you’re applying for a mortgage in the near future, you might want to hold off on getting new cards.

Opening a card for the discount

Signing up for a store credit card in exchange for a big discount is particularly tempting during the holidays. But beware of hastily accepting a sales clerk’s pitch.

For starters, store credit cards tend to have higher interest rates; the Macy’s card, for instance, carries an interest rate of 24.5 percent. If you tend to carry a balance, that means the interest charges you incur over time will eat into any savings you achieve initially.

Another risk is that stores constantly offer cardholders special discounts and sales to get them to spend more. This can work to your advantage if you shop at the store regularly anyway. But if you’re trying to stay on a budget, try to avoid such temptations.

Store-branded credit cards also tend to have lower credit limits, which could hurt your score if you’re not careful. This is because the portion of your credit line that you’re using is a factor in your score; the closer your balance is to the credit limit, the greater the negative impact on your score.

Spending just for the rewards

The promise of rewards may lead you subconsciously to spend more liberally than you normally would.

But be realistic about exactly how much those rewards are saving you. If you’re earning 1 percent cash back, that would be $5 back for $500 in purchases. That’s great if you were going to spend the money anyway, but a different matter entirely if you use rewards to rationalize big purchases.

Many card issuers are also touting the extra rewards customers can earn during the holiday. But as is often the case with accelerated rewards, there’s a cap on how much cardholders can earn.

In the case of Discover, the accelerated rate applies to a maximum of $300 in purchases, meaning the most you’d get back is $15. After that, purchases earn the standard 1 percent cash back, or 0.25 percent if cardholders haven’t spent $3,000 yet for the year.