Checking Account Bonuses May Be Too Good To Be True
No matter how much you shop around, it’s hard to find a savings account with an interest rate over 1 percent at any of the major banks. Rates are a little better at online banks, but even then it’s rare to find anything over 1.5 percent. In this low-yield climate, checking accounts that offer initial opening bonuses can look increasingly attractive to bank customers looking to get something back for their investment, but they are not always as good as they appear.
These accounts tend to come with strings attached, and while these requirements can be simple, breaking them can mean paying fees or losing the bonus. When customers open these accounts, it is the bank’s objective to keep them—and their money—for as long as they can, so banks require customers to enroll in other services, some of which may not be free. The most common requirement is a minimum account balance, which can be anywhere from $100 to $1,500 or more. Most banks also require the customer to have at least one direct deposit per month, and some go the additional step of attaching a dollar amount minimum to this deposit. Other requirements including signing up for online bill pay or making a minimum number of debit card transactions. These steps lessen the odds the customer will go through all the steps necessary to leave for another bank, and just to be safe the banks usually attach penalties for early account closure.
Over the course of a few years, chances are the bank will have earned back most, if not all, of the bonus through ATM fees, overdraft fees and even monthly fees for using debit cards, which is the latest trend in bank fees. Often these accounts are designed to attract customers into products that don’t match up terribly well with competitors’ accounts. A $100 bonus might help in the short-term, but if the account has a low interest rate or many fees attached, it could still be more cost effective to find a free checking account or an account with a better interest rate and no bonus. Signing up for these accounts can be hazardous, too, as banks sometimes use hard credit inquiries that can be damaging to a credit score. This check also helps banks spot customers to hop from bank to bank to take advantage of special offers, and these customers are usually denied accounts.
Even when all the bank requirements are met, the customer may not be in the clear yet. Banks classify these bonuses as interest rather than a gift, so when it comes time to pay the federal taxes, the account holder will have to pay taxes on these promotional gifts. So if the customer has a marginal tax rate of 28 percent, and opens an account that pays $100 bonus, they will end up handing $28 back to Uncle Sam in April.