Why Banks Offer Sign-Up Bonuses and Why You Should Take Advantage

Wide shot of millennial couple lounging in their living room, planning out their finances and looking at their account via online banking.
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Banking is a competitive business. It’s likely that if you sit and think for even a moment, you can name five, 10 or even more banks just in your own neighborhood. From the perspective of a customer, that’s great news.

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The more that banks have to fight with each other for your business, the more opportunity you’ll have to score some great sign-up bonuses. Whereas most customers used to stay with the same bank for most of their lives — as they often used to stay with the same employer — advances in banking and the increase in available options have made bank-hopping much easier and more appealing.

Here are some of the reasons you should take advantage of bank sign-up bonuses — and what you should look out for as well.

Banks Want To Attract New Customers

Although banks exist to provide financial services for their customers, they’re also for-profit enterprises that attempt to attract as many customers as possible. While a solid roster of products and services may keep customers for the long run, a big sign-up bonus is often used to entice them in the first place.

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After all, it’s easier for a bank to catch the eye of a potential customer with a splashy ad campaign about free money than it is to convince them that it offers the best all-around financial services package. However, once the customer has opened an account, then the bank can take the time to promote its other services.

Banks Also Want To Generate Profitable Transactions

While you may occasionally score a sign-up bonus with no strings attached, banks have gotten much shrewder about the restrictions they attach to their offers. In many cases, in order to qualify for a sign-up bonus you’ll have to make certain transactions that are profitable for the bank.

For example, you may only be granted a sign-up bonus if you commit to making 20 debit card transactions in a month, or if you sign up for direct deposit. Although you may not feel money going out of your pocket for these types of transactions, they are profit-makers for the banks, so they are often attached to any “free” giveaways.

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But, the Bonuses May Be Lucrative

In the early days of banking, customers might receive a bank mug or even a toaster for opening a new account. Nowadays, though, you’re much more likely to get a sizable cash offer.

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For example, you might be able to snag a $200 bonus if you deposit $20,000 into a new savings account and keep it there for three months. While this may not seem like a lot at first, if you do the math, it’s an incredible offer. That $200 bonus amounts to 1% of the $20,000 you deposit, but it’s paid out over just one quarter, giving you an annual rate of 4%. As the current average savings deposit rate is just 0.17%, that’s a tremendous benefit.

Even the most generous online savings accounts generally pay less than about 2.75% as of Oct. 2022, so earning an effective annual rate of 4% is a great perk.

Note That Signup Bonuses May Be Taxable

One thing that many customers overlook about sign-up bonuses is that they may very well be taxable. Typically, banks issue 1099s at the end of the year declaring any sign-up bonuses paid as interest income. This means that you’ll have to pay tax on the amount of the bonus at your ordinary income tax rate.

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While this shouldn’t be a deal breaker, you should be aware that the true value of your sign-up bonus may be reduced by 10% to 30% or even more if you are in a high tax bracket, and factor in state income taxes as well. 

Be Aware of Any Fees in the Fine Print

In addition to committing yourself to certain transactions, such as POS purchases or deposit requirements, you may have to pay fees on your new bank account. For example, you may get a big sign-up bonus but have to pay a $15 monthly fee on your new account.

Or, you may have to commit to keeping your money in the account for three months or even longer to earn your bonus. In some cases, you may even face a penalty fee if you close your account before three, six or even 12 months. Remember, banks aren’t in the business of giving away free money, so be sure you can avoid fees that will eat up the value of your bonus before agreeing to open a new account.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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