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Free checking account and credit card offers - what's the catch?

November 03, 2015

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

Multiple credit cards

Q: I keep hearing that bank fees are going up, but on the other hand, I keep seeing free offers from banks - a $100 bonus for starting a new account from one, 0 percent interest on credit card transfers from another, etc. Would it make sense for me to keep jumping from bank to bank to take advantage of these offers, or is there a catch?

A: Banks in recent years have been looking for more ways to squeeze fee income out of their customers, but they know that first they have to get those customers in the door, which is why they run special promotions.

The question is, to what extent can you take advantage of those promotions without paying extra fees or interest charges? That depends on steering clear of two things:

Hidden fees and penalties

What banks promote as "free" might come at a cost. For example, 0 percent balance transfer deals may waive credit card interest for a period of time, but they might cause you to incur a balance transfer fee. That fee might come from the new credit card or the one from which the balance is transferring. In either case, on a card with a 12 percent interest rate, three months of free interest will save you the equivalent of 3 percent. If you incur a 3 percent balance transfer fee in the process, you really haven't gained anything.

Another example is if the special offer subjects you to a penalty if you don't meet certain commitments. For example, a $100 incentive to open a checking account might require you to keep the account in place for a full year, or else pay a termination penalty. If the monthly fee on that checking account is $15, then over the course of a year, it would cost you $180 to earn that $100 incentive.

Inertia

Even if there isn't a direct cost associated with special bank offers, what the banks are counting on is a certain amount of inertia from customers - that once in the door, they won't be quick to change banks even after they are no longer benefiting from the special offer. For example, if you take advantage of a free balance transfer offer but pay a higher interest rate in the long run, unless you switch again after a few months, you will soon be paying more on your existing balance and new purchases than you would have otherwise.

With checking accounts, if you switch to an account with higher fees just to earn an incentive, before long you will probably be paying more in extra fees than you received for starting the account, unless you switch again. Banks count on most customers not doing that, and in most cases they are right.

Considering the pluses and minuses of bank offers, the best advice is to be selective. Don't jump at every offer you see, but if you see a good incentive from a bank that you could live with for a while anyway, go for it.

Add your comment: Are free checking accounts and credit card offers worth it or do they come with a price?

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