Now at your local bank: Free money
More banks are paying you to open accounts, but 'free' money has a cost.
There is no such thing as free money -- unless, of course, you want to open a checking account. Several banks have started offering cold, hard cash to get new customers in the door.
But hidden in the fine print are fees and rules that will wipe out the windfall.
Cash incentive offers have more than doubled over the last year, says Schwark Satyavolu, chief executive of BillShrink.com, which tracks bank account trends. Citigroup is wooing new customers with up to $300, Capital is offering $200, JPMorgan Chase is doling out up to $125, and online bank WTDirect.com's account carrot is up to $300 for opening a new savings account. And in the last month, more than half a dozen small banks have also rolled out similar incentives of up to $220.
For the banks, this is a calculated tradeoff. As they start lending again, banks need more cash from deposit accounts to help fund those car loans and mortgages. So while a handout from a bank might feel like you've won the lottery, you're actually handing over the real prize: your money.
Banks are targeting "good" would-be customers who are likely to maintain high balances and use their debit cards frequently, says Satyavolu. In turn, they hope new accountholders will raise banks' revenues and apply for loans down the road. When customers need a mortgage, "they're going to turn to the bank they have their core relationship with," a Chase spokesman says.
But savvy consumers know there's no such thing as free money. Expect to jump through serious hoops just to qualify. For starters, you don't get the cash right away. You first have to meet certain requirements, many aimed squarely at getting more of your money.
To get the $300 at Citi, which is available through the next two weeks, you'd have to open a Citigold interest checking account (which offers a meager interest rate of 0.15%) and deposit $1,000 by Nov. 18. Then, you'll have to 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.
And when you finally get the money, expect a bill come tax time. All of these cash bonuses (like other promotions) will be taxed as regular income. If you're in the 25% tax bracket, that $300 award will drop to $225.
Even after you get the money, you could lose it to other new and increased fees. Here are the three fees to ask about before signing up for a new checking account:
Minimum required balance. Consumers who receive cash offers for a new account should watch out for minimum balance requirements, which more checking accounts require these days. And those minimums are rising.
The average minimum balance requirement is a whopping $3,883 for a no-fee interest-bearing checking account, up 15% from last year, according to Bankrate.com. That minimum falls to $249 on non-interest checking -- still 34% higher than last year. The average customer who falls below the threshold pays a fee as high as $13. Look for accounts with zero minimum balance requirements; ING Direct, for example, doesn't require a minimum balance and has no fees associated with the $50 new account bonus.
Bank of America's offer of $25 for signing up a friend (who also gets $25) doesn't go far once service fees kick in. The bank -- which has 57 million consumer households as customers -- charges a $12 maintenance fee for its regular checking accounts that fall under its minimum daily balance requirement of $750. That fee increases to $14 on Nov. 4 for balances that dip below $1,500. Or you can 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.
Debit card rules. At Chase, consumers need just $25 to open Chase Checking and to get up to a $125 cash bonus. But accountholders will be charged $6 per month if they don't buy something with their debit card five times each month or have at least one monthly direct deposit posted to their account.
Similarly, ING requires three transactions -- debit card purchases or transfers from your account to someone else's (at ING or elsewhere) -- within the first 45 days to get the bonus. For most customers, this shouldn't be too onerous; according to experts, many debit card holders use them at least five times a week.
For banks, though, this is lucrative: They make money with interchange fees -- the fee that banks charge merchants when a consumer uses a debit card for purchases, typically up to 2% of the total amount spent each time.
Small banks stand to make the most before long, because they won't be affected by new rules that go into effect in July limiting what the big banks can charge. (The big banks' fees are expected to stand at about 1.2% after the new rule; small banks will still able to rake in up to 2%).
Overdraft fees. Along with cash bonuses, new checking accounts come with a hard sell on overdraft coverage. Avoid it.
Banks generated $37.1 billion in overdraft fees in 2009, according to Moebs Services. The fees kick in when consumers withdraw more money from their checking account than they have. As of August, new Federal Reserve rules prevent banks from automatically enrolling consumers in debit card overdraft coverage -- which permits purchases to go through even if the consumer doesn't have enough money in the account, thereby allowing banks to collect their fee. Now, customers who do nothing will have their overdraft purchases declined.
The fee per overdraft averages $30, up 3% from a year ago, says Greg McBride, a senior financial analyst at Bankrate.com. Even worse, banks often post transactions out of order, which will only increase overdraft fees. For example, a consumer with $150 in a checking account who makes purchases of $100 and $200 could see the bank post the $200 purchase first, resulting in two overdrafts and at least $60 in fees, says a spokeswoman at the Center for Responsible Lending.
Another option that can help you save money is to 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.
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Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.
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A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.
Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
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