There's nothing like cash as an incentive to do something. But you should always be wary when something sounds too good to be true. Like banks giving away free money just so you'll open a checking account. Those cash incentives are quickly erased by hidden fees and restrictions.
Still, these "free money" offers have more than doubled over the last year. Schwark Satyavolu, CEO ofBillShrink.comtracks bank account trends. He says Citigroup has started to lure in new customers with up to $300. Meanwhile, Capital One is offering $200 while JPMorgan Chase is handing out a miserly $125. Not to be outdone by Citigroup, the online bank WTDirect.com is also offering to $300 for opening a new savings account.
So what's going on? Even in the last month, more than half a dozen small banks have also rolled out similar cash incentives of up to $220. Have the banks suddenly become generous? Don't count on it. For the banks, this is a calculated tradeoff.
You see as soon as the banks start lending again and many of them have, they need more cash to help fund car loans and mortgages. Where do think they get it? From all those checking and savings account deposits. So while you may think you've just found some free money, the bank is the real winner because they've just taken in your money in that new checking or savings account.
As Satyavolu explains it, banks are targeting "good" would-be customers, who are likely to maintain high balances and use their debit cards frequently. In exchange, they hope new account-holders will raise banks' revenues and apply for loans down the road. When customers need a mortgage, they tend to turn to the bank they have their core relationship with.
No free lunch
We all know there's no such thing as
free money. You're going to have to do some serious depositing to
even qualify for that incentive.
Let's say you go to Citigroup. It's
going to take you about two weeks to get the money and that's
provided you open a Citigold interest checking account, which
offers an interest rate of 0.15%. Wow! How do you even compute such
a low rate? That's a whole 15 cents on $100.00.
Then you have to deposit at least
$1,000 by November 18 and maintain an average daily balance of
$1,000 through the end of the month. You'll also have to sign up
for three more Citi products -- like a savings account,
certificate of deposit or a credit card --within two months of
opening the account.
When you do finally get the money, you'll have to pay taxes on it. Cash incentives are taxed as regular income. So if you're in the 25% tax bracket, that $300 award drops to $225 in after-tax dollars.
That's not all. Even after you get
the money, you could lose it to other new and increased fees such
as a failure to meet the minimum balance requirements. According to
Bankrate.com, the average minimum balance requirement is $3,883 for
a no-fee interest-bearing checking account. That's an increase of
15% from last year.
Bankrate.com says the minimum falls to $249 on non-interest checking but that is 34% higher than last year. The average customer who falls below the threshold pays a fee of around $13. So try to find accounts that have zero minimum balance requirements. ING Direct has one but it doesn't give out as much "free" money either. The ING Direct account doesn't require a minimum balance and has no fees associated but only gives out $50 as a new account bonus.
Bank of America offers you $25 for signing up a friend, who also gets $25. But that doesn't go very far once service fees kick in. Bank of America charges a $12 maintenance fee for its regular checking accounts that fall under its minimum daily balance requirement of $750 and that fee is going up to $14 on November 4 for balances that dip below $1,500. You can, however. link your checking account with a savings account at the bank, but even then, you'll need to keep at least $2,000 total between the two accounts to avoid the fee.
At Chase, you can open an account
with just $25 and still receive a $125 cash bonus. But you'll be
charged $6 per month if you don't buy something with their debit
card five times each month or have at least one monthly direct
deposit posted to their account. That's similar to ING which
requires three transactions - debit card purchases or transfers
from your account to someone else's - within the first 45 days to
get the bonus.
Overdraft fees
Then there are those overdraft fees.
Banks want you to get what's called "overdraft coverage" on your
checking account. Don't. In 2009, banks took in $37.1 billion in
overdraft fees. These fees get charged any time a consumer
withdraws more money from their checking account than they have in
it.
As of August, new Federal Reserve rules prevent banks from automatically enrolling consumers in debit-card overdraft coverage. It's that coverage which permits purchases to go through even if the consumer doesn't have enough money in their checking account. This is what allows banks to collect their fee. Now, customers who do nothing will have their overdraft purchases declined, which may be humiliating but it's not going to cost you extra fees.
The fee per overdraft averages $30. To further confuse you, sometimes banks will post transactions out of order. So let's say you have $150 in your checking account. You buy something for $100 and then something else for $200. If the bank posts the $200 purchase first, you'll get hit with two overdraft fees. There is an option that could help save you money. Ask the bank to link your checking to your savings account to avoid overdraft fees. Chase and Bank of America offer this service, but it costs $10 each day the checking account is overdrawn.
See, nothing's really for free.
