Should You Open a New Credit Card for the Holidays?
Here are four questions you should ask yourself before you open a new credit card for the holidays.
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For many households, the holidays represent a time of increased spending. Between all the parties, gift exchanges, travel, and events, it's not unusual for the holiday season to include many expenses that you wouldn't normally encounter throughout the rest of the year. According to the accounting firm PwC, consumers plan to spend an average of around $1,400 this year on holiday costs.
If you know that you plan to spend more money over the holidays, you might wonder whether it's a good time to open a new credit card. Opening a new credit card account — especially a new rewards credit card — does have the potential to offer you numerous perks. At the same time, there are items to consider as well when it comes to opening a new holiday credit card account.
Below are four questions you should ask yourself before you open a new credit card for the holidays. The answers to these questions can help you determine whether now could be a good time to apply for a new credit card, or whether you might want to hit pause instead.
1. Are you committed to paying off new charges each month?
Credit cards can offer you many benefits as a consumer. They are convenient payment methods, offer fraud protections, and many accounts feature credit-building potential too. (These features are also reasons why some consumers might prefer to use a credit card over a debit card in the right situations.)
The best way to manage credit cards is to pay them off in full each month. Paying your full statement balance can help you avoid credit card debt and avoid paying interest charges on most credit card accounts. This good habit might also help you keep a lower credit utilization rate— especially if you can pay down your balance before the statement closing date on your credit card account. Lower credit utilization has the potential to help your FICO® Scores.
One of the first questions you may want to ask yourself when you're considering a new credit card is whether you believe you'll be able to pay off balance on the account each month. If the answer is no, it's important to understand that revolving an outstanding balance from month to month might cost you money in interest charges (unless you have a 0% introductory APR on the account). And even if revolving a balance doesn't cost you money, that action might increase your credit utilization rate and could have a negative impact on your FICO® Scores.
2. Could a new credit card benefit me?
There are numerous ways that opening a new credit card for the holidays might benefit you. Here are a few examples of the perks you might be able to enjoy, depending on the type of credit card you open.
When you open a new credit card you might:
- Have the opportunity to qualify for a sign-up bonus.
- Have a chance to earn more generous credit card rewards on your purchases.
- Enjoy special cardholder statement credits and other benefits.
- Be eligible for a low or 0% promotional APR.
- Be able to lower your overall credit utilization ratio (especially if you're carrying balance on other credit cards).
- Have the potential to build positive credit history if you manage the account responsibly.
3. What is the condition of my credit?
When you apply for a new credit card, there's a good chance the card issuer will check your credit report and FICO® Score as part of the application review process. (Note: FICO® Scores are used by 90% of top lenders.)
Since you know that a credit review will take place, it's wise to know where you stand in advance. You can check your own FICO® Scores online. You can also visit AnnualCreditReport.com to access free copies of all three of your credit reports (note however, that these credit reports do not have a credit score).
If you discover that your credit is in great shape, you can relax more going into your upcoming credit card application. A good FICO® Score doesn't guarantee that you'll qualify for a credit card, but it can improve your approval odds. A low FICO Score, on the other hand, could make you ineligible for many credit card products.
4. Do I plan to make any large purchases in the near future?
There's nothing wrong with getting a new credit card to take advantage of a welcome bonus, extra rewards, an introductory APR, or some other perk, as long as you can manage the account in a responsible way. But you might want to rethink your strategy if you have other major purchases on the horizon.
For example, let's assume that you plan to purchase a new home in a few months. Furthermore, to cover the cost of the home, you intend to apply for a mortgage. In this scenario, your priority should be getting your credit and FICO® Scores into the best shape possible for your upcoming mortgage application. A new credit card, meanwhile, could possibly cause temporary setbacks to your FICO Score due to issues such as:
• New hard credit inquiries
• New account on your credit report
• Lower average age of accounts on credit report
• Increased revolving balances/higher revolving utilization percent.
If you have a large purchase coming up, you might want to hold off on unnecessary credit applications on a short-term basis. Opening too much new credit in a short period of time has the potential to have a negative impact on your FICO® Scores (depending on the overall make up of your credit report).
For some people, opening a new credit card for the holidays could be a good idea. If you have a good FICO® Score, it's nice to be able to enjoy the benefits of good credit when you discover an attractive credit card offer that appeals to you.
Just take the time to ask yourself the important questions above and make sure that it's the right time to open a new credit card. If you're FICO® Scores need work or if you're preparing to apply for another type of financing soon, you might want to hold off on your next credit card application until a later date.
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