Free money from the banks – too good to be true?
We are all very aware of the saying that if something sounds too good to be true, it probably is. The same applies to the banks, if not especially to the banks.
You will have probably come across an offer from a financial institution promising you $100 or more if you open a bank account with them. While everyone loves free money, it’s important that you understand the many restrictions and potential costs that setting up the account entails. You will find that while these promotional offers are fun for people who enjoy “playing the system”, for the busy and for the less sophisticated, they can often do more harm than good. We would only recommend them if you have a genuine use for the extra account, or are willing to put in the extra effort and caution.
We all love free money and there’s nothing quite like having the bank pay for your movie night out or a gift for the kids. Moreover, having an additional account may also bring about extra useful benefits, especially in the case of a savings account.
You can set it aside for a specific purpose and turn it into a goal saver. For example, for an end-of-year holiday, for a deposit on your first property, or even as a college fund for the kids. If nothing else, it is always wise to have a rainy day fund. Sometimes diversifying your savings might be sufficient reason alone – it goes without saying that you should never have your eggs in one basket. Through having an additional account, you can safeguard yourself against potential fraud or otherwise misappropriation of funds.
Loyalty programs: the basic principle
In the first place, the setup of these cash incentive offers is very similar to loyalty programs. That is, you receive the reward but in turn you will be locking yourself in to a fixed range of services and products provided by the financial institution. That’s the bank’s rationale behind these offers. Transaction or savings accounts are usually considered as the “basis” or “foundation stone” to a client’s relationship with their bank. The low interest rate these days makes it extremely difficult for the banks to differentiate themselves, so they have intuitively moved towards cash incentives to appeal to consumers.
Once you have a transaction or savings account set up with the institution, they can expect a debit card, credit card, personal loan or eventually maybe even a home loan flowing over to them. As such, you might receive the initial $100 for transferring your banking, but you may have to miss out on more favourable products offered by other financial institutions.
Another feature of loyalty programs is that they are not as “free” as you may expect. Even without any monetary costs, through the signing up process you provide the financial institution with your personal information. This information is valuable and may bring you additional marketing material which you may not want (think SPAM).
Another key feature is that the financial institution may reserve the right to change the conditions of the bonus at any time, often without the client’s input. As such, it may not be certain that your bank will end up honouring their initial promise.
There is no free lunch and the financial institution will make sure that they make you jump over a hurdle or two… or 10 to receive your sign-up promotion. In its simplest form, your bank might charge you numerous fees for maintaining the account. Depending on the institution, you may have to pay from $5 to $20 per month. Additional fees of consideration include ATM fees and transaction fees.
Like any other form of income, the cash paid out to you may also be subject to taxes.
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In addition, it is also typical with these offers that you may have to maintain a minimum balance of $2,000 or more in the account, for a fixed period of time, until you can be entitled to the bonus. Likewise, your bank may also require you to set up a direct deposit, completing a minimum number of transactions over a period, or taking out additional products on the side which may incur fees. You get it, the list is endless.
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Other forms of freebies
These days the banks have come up with increasingly novel ways to give out “free” money. Promotional offers might come in the form of referral programs which reward you a fixed amount every time a referral is converted to a client, or even the more innovative “Keep the Change” Program taken out by the Bank of America. Nevertheless, you will need to keep the things we have mentioned in contemplation when balancing the costs and benefits of the offer.
What an effort
Of course, you can always keep the aforementioned costs and benefits in mind whilst you take out the offer and check all your odds. However, at the end of the day, you will likely ask yourself if it is even worth the effort and hassle, particularly if you would like to take up more than one of these offers.
You will have your funds scattered over the many banks, and you will have to pay attention to all of them. Most banks also have an abandonment policy, meaning that if you forget about them for long enough and have your funds unattended, your money will be given to the government, and the bank charges a fee for the handover.
For those who will make use of the extra account or enjoy playing the game against the system, the answer will be a definite “yes”. Yet, for the rest, this “free money” is probably just another headache in disguise.