Bank Giveaways for new accounts—often not a good deal

By Remar Sutton, DCU StreetWise Spokesperson

Financial institutions want your business, and if they already have your business, they want to keep it. To lure new customers and to keep existing customers, a number of banks and savings institutions in particular are turning once again to gifts. Those give-aways of small kitchen appliances—blender, anyone?—I remember from my youth are still around, but the range of “premiums” (the technical name for such marketing give-aways) has expanded. Premiums offered range from cash, casserole sets, watches, DVD players, and even big-ticket items such as computers, airline tickets, and even cars. At one bank, putting $100,000 in a 5-year Certificate of Deposit (CD) at 1% interest will get you a Pontiac Sunfire, or $400,000 in a 5-year CD at 1% interest will get you a Cadillac SRX.

Why are some financial institutions offering such tangible goodies?

Incentive gifts are less expensive for the institution than offering cash incentives or paying higher interest rates on accounts. Knowing that fact will make a savvy consumer look at the fine print and weigh the pros and cons before biting.

Here’s a short list of some of the typical factors to consider and questions to answer.

What will give you a greater yield on your money—a higher interest rate or a low interest rate and the gift. The current average rate for a 5-yr CD is 3.51% according to bankrate.com. DCU’s rate for a 5-yr jumbo Certificate is 4.51%. If you took the 1% CD plus the car in either example mentioned previously you’d be throwing away thousands—see our sidebar comparison.
You may have to pay taxes on some of the biggest-ticket gifts. If the gift cost the bank more than $10 to buy and you have less than $5000 in deposits, the value of the gift may be considered “interest.” You have to treat that as income.
To get some premiums, you often have to agree to deposit more money or keep higher minimum balances than for the same type account in another institution. Can you afford to make the bigger deposit or keep the higher minimum balance? Can you use direct deposit?
What happens if you don’t meet the terms, such as maintaining the minimum balance? Is the value of the gift deducted from the account balance? It is in a lot of cases.
Don’t forget to look at the fees the institution may charge, such as ATM fees, overdraft fees, fee for dropping below the minimum monthly balance, and other service fees.

Looking more closely at one typical offer

I selected at random one savings institution which has been advertising a variety of gifts for opening a free checking account and taking out a 4 to 10 year certificate of deposit. Let’s get out our magnifying glass and look at that fine print more closely. Here’s what it says:

Substantial penalty for early CD withdrawal
The gift minimum must be maintained for the full term of the CD and for one year in non-CD accounts or the value of the gift will be deducted from your account balance
Minimum opening deposit of $500 is required for a free checking account.
The value of all CD gifts will be considered as interest on your account for income tax purposes in the first year the account is opened. So a 1099-INT statement will be issued for the gift amount including tax and delivery costs letting the IRS know you got it.

But, I’m really tempted by the offer to sock away $20,000 in a 10 year CD at 5.25% APY and choose from an HP Desktop bundle (computer, monitor, printer), HP Notebook bundle (computer, printer), Sony 36” WEGA TV with stand, or Mitsubishi 48” Rear Projection HD Ready TV. On second thought, however, do I want to lock up my $20,000 for 10 years with no chance to take advantage of possible higher rates? Do I want to pay taxes on the retail value and shipping of that big-screen TV? Can I get an equal or greater yield on a shorter term CD if that’s my savings vehicle of choice?

What’s the real bottom line? Before you rush out and move your money, carefully compare your options. Never forget, the institutions offering the “free” giveaways are in it to make a profit—that’s their bottom line. No matter what financial institution is trying to attract your account with a freebie, always do the math. And make sure when you’re doing the math, that you check the accounts and services available at your credit union—you’ll find that DCU offers some of the very best interest rates and accounts in the country. You can earn more on your savings—and buy your own blender.

So, what do you think?

If you find this review helpful, please pass the word to your friends. Also email me with any comments or suggestions.

Remar Sutton

What’s the better deal?

You’ve got $100,000 and $400,000 you’d like to sock into a certificate of deposit for five years (60 months). XYZ bank is offering 1% compounded daily plus a vehicle. Your Credit Union, DCU, is offering 4.51% compounded daily. To present the bank’s offer as a “best case” scenario, we’ve chosen the highest MSRP for vehicle (the bank is probably not offering a loaded vehicle and certainly will not pay MSRP for it, nor would you if buying the vehicle).

Credit Union Certificate @ 4.51%		XYZ Bank CD @1% plus vehicle
	Yield at 5 yrs	Yield at five years + MSRP of vehicle
$100,000	$125,293	$105,127 + $15,015 Pontiac Sunfire
Net yield	$25,293	$20,142
Credit Union Certificate offers $5,151 greater yield
$400,000	$501,173	$420,503 + $52,730 Cadillac SRX
Net yield	$101,173	$73,238
Credit Union Certificate offers $27,935 greater yield

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