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Get new credit card for sign-up bonus?

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Highlights
  • Some credit cards offer as much as $500 cash back as a sign-up bonus.
  • A majority of credit card offers feature an intro rate on purchases.
  • Chasing and dumping new rewards cards can lower your credit score.

Have you been tempted to get a new credit card just for the sign-up bonus or reward?

Credit card sign-up bonuses keep getting more attractive. What once was just a $100 cash-back reward for getting a new credit card has become $500 in some cases. Sign-up incentives for airline cards can take you even farther, literally, as issuers pile on the miles for new customers.

With deals this good, it's tempting to sign up just for the introductory rewards and ditch the card once you've used up the bonus offer.

The pros of being a 'bonus surfer'

Enter the "bonus surfer," a term coined by Andrew Davidson, senior vice president at research firm Mintel Comperemedia, to describe customers who chase credit card sign-up incentives only to leave the card after cashing in the bonus.

"That customer is a savvy transactor who has maintained a good credit score, receives the best offers and likely has a renewed appreciation for a 'good deal' as a result of the ongoing economic crisis," Davidson wrote in his blog in December.

You can hardly blame the bonus surfer. It's hard to ignore the plethora of sign-up bonuses out there. In 2011, 2 out of every 3 credit card offers featured a little sign-on extra, according to market research firm Synovate. That's up from 1 in 5 in 2008 and a little more than half in 2009 and 2010.

The sign-up bonuses are more lucrative, too.

"Cards that we saw offering standard sign-on bonuses of $100 to $200 just earlier (in 2011) are now toting bonuses of up to $500 in cash back," says Roy Persson, director of competitive tracking services at Synovate.

He also noted that hotel rewards cards are giving away five to six free nights as a sign-up bonus, up from two to three free nights in years past. Airline cards, similarly, are going beyond the traditional 20,000- to 30,000-mile incentive by adding more miles and free companion tickets, he says.

Issuers aren't stopping there. Introductory annual percentage rates, or teaser rates, are also turning heads. Synovate's research shows 79 percent of offers in 2011 carried an intro purchase APR, compared with 55 percent just two years prior.

"Incentives go hand in hand with rewards cards attracting that really good customer with low risk, high usage and high end," says Lisa Hronek, a senior analyst at Mintel Comperemedia. "It adds another layer of stickiness to an already attractive offer."

Should you bite?

In your zeal for a good deal, should you bite at one of these offers and then spit it back out when you've earned the sign-up bonus?

"From a financial perspective, it seems like a clean thing to do," says John Ulzheimer, president of consumer education at SmartCredit.com. "But from a credit-scoring perspective, it's a very dangerous thing to do."

Ulzheimer explains that each time you apply for a credit card offer the issuer will pull your credit report and score to determine if you qualify. That credit check will cause a hard inquiry on your credit report, and it will ding your credit score.

The damage doesn't stop there.

When you close the card, it will reduce the amount of your unused credit and raise your utilization rate -- how much credit you're using versus the credit limits on your revolving accounts such as credit cards. Hint: The higher your rate, the worse the impact is on your score.

Additionally, your new credit card will lower your average age of accounts, which poses another dent to your score. It doesn't matter if your newest account is closed, says Ulzheimer. It still counts against you.

The injury from these factors won't heal in a few weeks or months, either. Your credit score could eventually fall below what issuers consider the accepted range for the best sign-up bonuses.

"Everyday people with average credit are getting offers," says Mintel's Hronek. "But we can make some broad-based generalizations that the more lucrative offers will be targeting people with better credit."

Even worse, your lower credit score could mean higher interest rates if you apply for other types of credit such as a mortgage or auto loan. Paying those higher interest rates could offset any extra money you get from a sign-up bonus.

There are other pitfalls, too. If you open too many credit cards, you may face money management chaos as you juggle payments for multiple accounts, says Linda Sherry, director of national priorities at watchdog group Consumer Action.

She also notes these offers may be peppered with restrictions or conditions. For example, bonus airline miles may expire or come with blackout dates or other restrictions. Sherry recommends doing the math, too: Maybe 30,000 miles doesn't get you as far as you think.

"Instead of chasing all these deals, find a card that works for you," says Sherry. "And stick with it."

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Balance Transfer Cards 15.80% --0.00 15.80%
Cash Back Cards 16.42% --0.00 16.42%
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