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Are bank sign-up bonuses worth it?

By Holly Johnson

Anyone who has tried to build up their savings account in recent years has likely been disappointed with their earnings. This is in part because record-low interest rates have made it difficult to earn enough to keep up with inflation, and in part because today’s fragile economy has made building principal a challenge for many.

But those who have been paying attention haven’t let weak interest rates prevent their savings from growing. Instead of relying on interest accrued the traditional way, these savvy consumers have turned to alternative means of building savings — such as bank sign-up bonuses.

Incentives of this sort aren’t always worth the hassle, however. Here’s how bank sign-up bonuses work and what you should look for before chasing one.

Boosting your savings with a sign-up bonus

In order to attract new customers and introduce them to their products and services, many banks have begun offering signup bonuses to customers who are willing to open a new checking or savings account (or both) and meet certain requirements.

These requirements vary from bank to bank, but can include everything from keeping a certain minimum amount of cash on deposit at all times, using a bank-issued debit card for a certain number of transactions each month or setting up one or more qualified direct deposits that occur on a regular basis.

Bank account sign-up bonuses have risen steadily over the past few years to the point where it’s not uncommon to see offers in the $200 or $300 range. That’s additional income that may require minimal effort on your part. It may be possible to earn more by signing up for one of these popular offers and meeting the requirements than it is to keep funds in existing accounts earning low rates of interest.

For example, someone with $10,000 in an online savings account earning 1 percent would earn $100 in interest the first year. Meanwhile, moving those funds (or even half of them) to a bank offering a sign-up bonus could net as much as $200 to $300, or more in some cases.

However, there are a few caveats for consumers who might be interested in these offers.

What you should know about bank sign-up bonuses

Securing a hefty signup bonus may be a great way to grow your savings account and increase your overall wealth. However, there are other factors you should take into consideration aside from earnings alone. For example, it always pays to compare checking accounts before switching to a new bank because what is included can be drastically different from bank to bank.

For example, your old bank might have offered special perks you took for granted that the new bank doesn’t — perks like no monthly fees for checking, free checks or online bill pay.

Meanwhile, the bank offering up the bonus might have hidden fees you’ve never paid before and those fees could chip away at your sign-up bonus or even deplete it entirely. Before you open a new checking account or online savings account, make sure you understand all the terms that come with your new account.

Also keep in mind that you will likely need to pay taxes on your bonus since most banks issue a 1099-INT for any additional amount of money you earn from them during the year. This is important because, although the sign-up bonus is taxed as if it were regular bank account interest, the extra “bump” could increase the amount of money you owe or have other consequences when it comes to your personal income taxes.

Still, with checking and savings account interest rates being so low, it’s easy to see the allure of bank sign-up bonuses. Just make sure you perform your due diligence before pursuing one of these incentives.

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