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How to approach bank bonus offers

January 08, 2015

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Bonus banking

Ally Bank wants to give you $500. Interested?

Bank bonuses are nothing new, but often they are little more than window dressing. In the case of the current offer from Ally Bank though, the numbers are large enough to make the deal well worth considering. The Ally Bank program applies to new deposits received into IRA accounts between January 1, 2015 and May 31, 2015, and starts with a bonus of $100 on a deposit of at least $25,000. (Ed. note: Ally Bank is an advertiser with MoneyRates.com.)

At the very least, this offer is a good example to use for a discussion about putting deposit bonuses into perspective.

What to keep in mind about sign-up bonuses

While a lump sum bonus can sound tempting in dollar terms, there are two things you need to do to put it in perspective. The first is to calculate what it represents as a percentage of your account. The second is to remember that this bonus is a one-time payment, not an ongoing addition to your account.

Those ideas are important because often a bonus works out to be just a few basis points as a percentage of your account, and when you think about those basis points spread over the years you are likely to have the account, it really does not add much to the interest rate you will be earning. In Ally's case though, the bonus can represent as much as 50 basis points to an account yield (a deposit of $50,000 will earn you a bonus of $250).

In today's era of near-zero savings account rates, 50 basis points can be a difference-maker, even if you think of it as being spread out over a few years. Still, there are other considerations beyond the one-time bonus.

Examining the details

Here are some of the other things to consider in choosing a bank:

  1. Interest rates. A deposit bonus is a one-time thing, but the interest rate you earn will affect you year after year. So, a signing bonus typically should not be enough to make up for a low interest rate. In the case of Ally Bank, they consistently rank among the banks with the highest rates, so the bonus takes on a little more significance since it is not an attempt to make up for uncompetitive rates.
  2. Fees. Check out everything from maintenance fees to transfer charges. After all, there is no point getting paid a bonus by a bank if you are just going to pay it all back in fees.
  3. Locations. If doing your banking in person is important to you, branch locations matter -- and this would rule out Ally, since they are an online bank. For checking accounts, ATM locations also matter, because you do not want to fritter away your deposit bonus on ATM fees. This does not apply to the Ally offer, however, since it is for IRA CDs and savings accounts.

Again, there are things to consider beyond the one-time bonus. However, if you find Ally Bank lines up as pretty competitive based on those other factors, the bonus might be enough to tip the balance in its favor. That generally is how one-time bonuses should be regarded -- not as a primary reason for choosing a bank, but as a potential difference-maker if other factors are close to even.

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