The pros and cons of chasing bank account bonuses

Banks often compete to attract new customers, and one way they do that is by offering bank account bonuses. These offers can put extra cash in your pocket, but they come with some strings attached.

These bonuses can be attractive, but it’s important to understand the steps involved and how opening new bank accounts could impact you before you start going for bonuses.

What are bank account bonuses?

Bank account bonuses are incentives offered by banks to attract new customers. They typically range from a few hundred to over a thousand dollars, depending on the bank and the type of account you open.

“Seeking a bank bonus is a great way to get extra money for completing what are often relatively simple tasks,” says Matt Bundrick, co-founder of BankBonus.com. “These can range from connecting your direct deposit, maintaining a minimum balance, or using your new debit card.”

These bonuses are essentially a marketing tool. Banks hope that by offering you a cash incentive, you'll open an account and stick around as a long-term customer.

How bank account bonuses work

You'll need to open a new account and meet specific requirements to earn a bonus. Here's what you need to know:

Bonus amounts

These can vary significantly but are usually a few hundred dollars. Some banks offer tiered bonuses, where you can earn more by meeting higher requirements. For example, you might earn $200 for depositing $10,000 or $400 for depositing $25,000.

Qualifying requirements

These differ based on the type of account.

• Checking account bonuses: You'll typically need to set up direct deposits. For example, you might need to receive $2,000 in direct deposits within 90 days to earn a $200 bonus. Some banks also require you to make a certain number of debit card purchases.
• Savings accounts: These often require a minimum deposit and balance maintenance. Capital One, for instance, offers bonuses of up to $1,500 for new savings account customers who deposit and maintain balances of $20,000, $50,000, or $100,000 for at least 90 days.

Payout timelines

Don't expect to get the cash immediately. Even after meeting the requirements, it can take months to receive your bonus. Banks often have a waiting period before depositing the funds into your account, which can range from a few weeks to a few months.

Restrictions

Pay close attention to the fine print. Common restrictions include:

• New customer requirements: You might not be eligible if you’ve had an account with the bank in the last six to 12 months, and some banks might extend this even further.
• Early account closure fees: You may forfeit the bonus or pay a fee if you close the account too soon, often within a year of opening. This prevents people from opening accounts just for the bonus and immediately closing them.
• Geographic limitations: Some bonuses are only available in certain states or regions.

Account features

While a bonus may be attractive, don’t forget to consider the account’s regular features when choosing a bank. Look at monthly maintenance fees, minimum balance requirements, and interest rates. A high bonus might not be worth it if the account comes with high costs or unfavorable terms.

Pros of bank account bonuses

There are many benefits to going for bank account bonuses.

• Extra cash: The most obvious benefit is the bonus itself, which can boost your savings or help you reach a short-term financial goal. If you’re organized and have the time, you can potentially earn multiple bonuses yearly, boosting your extra income.
• Try out a new bank: Opening an account at a new bank allows you to test their services and features. If you’re not thrilled with your current bank, this can be a good way to explore alternatives without fully committing.
• Improved financial awareness: Meeting bonus requirements often means paying closer attention to your finances, which can benefit your overall financial health. You might become more aware of your spending habits or savings patterns.
• Potential for better banking services: As you try out bonuses, you might find a bank that offers better services, lower fees, or higher interest rates than your current bank.

Drawbacks and considerations

Before you start chasing bonuses, consider these potential drawbacks:

• Time and effort: Finding bonuses, reading the fine print, and managing multiple accounts takes time. You need to decide if the extra cash is worth the effort. This can be especially challenging if you're juggling various bonuses at once.
• Fees: Some accounts charge monthly or early closure fees, which can eat into or wipe out your bonus. Always calculate the potential costs against the bonus amount to ensure you're coming out ahead.
• Taxes: Bank account bonuses are considered taxable income. Be prepared to pay taxes on any bonuses you earn. The bank typically sends you a 1099-INT form reporting the bonus as interest income.
• Opportunity cost: "The most glaring drawbacks are the opportunity costs associated with tying up those funds in typically low interest-bearing accounts," Bundrick notes. "Most bonuses can be earned within three months; however, some may require you to maintain minimum activities for six to 12 months to earn some or all of the bonus cash."
• Impact on future account openings: Jim Wang, founder of WalletHacks.com, warns, "When you open a bank account, it's usually reported to ChexSystems. It's like a credit bureau report but for bank accounts. If you open too many accounts, your ChexSystems report will reflect this, and you may have problems opening new bank accounts later."

How to maximize the value of bank account bonuses

If you decide to pursue bank account bonuses, here are some strategies to get the most value:

1. Meet requirements efficiently: If a checking account bonus requires direct deposits, see if your employer will let you split your direct deposit across multiple banks. This way, you might be able to get multiple bonuses at once.
2. Time your account openings: Once you’ve met the requirements for one bonus, consider opening a new account to start working on another. This can help you maintain a stream of bonus income.
3. Consider the return on investment (ROI): "To maximize your earnings, go for bonuses that have the highest ROI on your time and capital required," advises Bundrick. "For some tiered bonuses that allow you to unlock more cash as you complete more activities or make higher deposits, you may find the sweet spot mathematically somewhere in the middle vs trying to max out the bonus."
4. Avoid fees: Set up small automatic transfers to keep an account active and avoid any inactivity fees. You can use calendar reminders to check when you can close accounts without incurring fees.
5. Read the fine print: Make sure you understand the requirements and restrictions before opening an account. Pay special attention to any fees that could eat into your bonus.

Are bank account bonuses right for you?

Bank account bonuses aren’t for everyone. They require attention to detail and the ability to manage multiple accounts. Before diving in, ask yourself:

• Are you comfortable managing multiple bank accounts?
• Can you keep track of various requirements and deadlines?
• Do you have the cash to meet minimum balance requirements for savings account bonuses?
• Are you organized enough to avoid fees that could negate the bonus?
• Do you have the time to research and pursue these bonuses?

If you answered yes to these questions, bank account bonuses might be a good fit for you. However, if managing multiple accounts seems stressful or you don’t have the cash to meet higher balance requirements, you might want to consider other options.

Alternatives to banking bonuses

Bank account bonuses aren’t the only way to make your money work for you and earn extra cash.

• High-yield savings accounts: These offer competitive interest rates without chasing bonuses. While the immediate payoff isn’t as high, the long-term benefits of a high-yield savings account can be substantial.
• Certificates of deposit (CDs): CDs can offer higher interest rates if you're willing to lock up your money for a set period. This can be a good option if you have savings you won't need to access immediately.
• Credit card sign-up bonuses: Many credit cards offer welcome bonuses and ongoing rewards, which can be a good alternative if you use credit responsibly. Just be sure you can meet the spending requirements without overextending yourself.
• Low-cost index funds: If you’re looking to grow your money over time, investing in low-cost index funds could be a good option. While this involves more risk than a savings account, it also offers the potential for higher returns.

The bottom line

Bank account bonuses can be a great way to earn extra cash but they require jumping through some hoops. If you decide to go for it, read the fine print, keep track of requirements, and choose bonuses that offer the best return on your time and money.

Consider the bank's overall offerings, including interest rates, fees, and customer service, to ensure you make the best choice for your financial needs. Ultimately, bank account bonuses can be a helpful tool, but they're not a get-rich-quick scheme. Use them wisely as part of a broader financial strategy, and you could see some extra cash coming your way.