Can chasing top savings rates hurt you?
Banks large and small are offering consumers a slew of seductive opportunities to boost returns on savings.
While incentives mean temporary bonuses for new customers, opening accounts solely in search of the latest, greatest offer could cost you in the end.
In some cases, the account with a $100 starter bonus has costly hidden fees. Opening new accounts also may damage the credit scores of consumers who are not careful.
“There are no free rides,” says Alan Lysaght, co-author of “The ABCs of Making Money.”
Hidden cost of saving
Lysaght says lenders who offer bonuses and other goodies usually expect to earn the money back in some other way.
“If a bank gives out a free bonus for opening a new account, they’re either going to make that money back by giving you next to zero interest, or you’re going to pay high fees for every transaction that you make,” he says. “And in a worst case, they’re going to do both. You’re going to pay for it somehow.”
Before opening a new account, consumers should examine the account’s fee structure, including monthly maintenance costs, debit or check transaction fees, activation fees for starting the account, costs associated with transferring funds into the new account from another institution and ATM fees, Lysaght says.
While banks frequently waive some of these fees on larger accounts, consumers who maintain smaller accounts could lose a significant portion of their savings to hidden charges.
“The No. 1 source of income for banks these days is fees, but a lot of times they’ll put the fees in the fine print so nobody reads it,” Lysaght says.
Once a customer knows how much the account costs, it’s time to look at what they’ll get out of it. While a gift card or starter funds are nice upfront bonuses, a sweet interest rate will be much more lucrative to the consumer in the long run.
“The best way to figure out if an account is good is to make a realistic assessment of how you pay for things — whether you write a lot of checks, if you use your debit card a lot, if you’re withdrawing money from ATMs — then go to the bank and ask ‘How much will you charge me for this and how much will I earn?'” Lysaght says.
“If someone is opening a regular checking or savings account without any sort of credit tie like an overdraft protection, there’s really no reason a bank would pull a credit report,” he says. “If someone is opening a CD or an account with an overdraft feature, then more times than not, they’re going to pull your credit report.”
Bonora adds that there are two kinds of credit pulls. “Soft pulls” are designed to help banks prequalify customers for certain products. They are done without the consumer’s knowledge and don’t impact credit scores.
“Hard pulls” are used to verify identity and credit history when someone applies for loans, mortgages or accounts with overdraft protection that rely on credit as a backup. Hard pulls are marked as a credit inquiry and can lower the credit score by up to five points. Such inquiries take six months or more to get removed from a credit report.
That means a consumer who racks up five stellar introductory offers by opening multiple new accounts over a few weeks or months could lose up to 25 points on his or her credit score. Such a drop significantly damages the prospects for getting great interest rates on a loan or mortgage.
Fortunately, hard pulls come with a few protections. For example, banks must get permission from the customer before doing a hard pull, says Carter Gibson, assistant vice president and commercial lender for First Alliance Bank in Memphis, Tenn.
In addition, credit bureaus grant consumers a short window of time to hunt for the best deal without it affecting their credit score.
“Whether it’s loans or deposit accounts, (credit bureaus) give a two-week period to allow for rate shopping,” he says. “No matter how many banks pull your credit report within that two-week period, it only goes on your credit report once.”
The allowance only applies for consumers comparing “like” products. Someone comparing checking accounts at three different banks within the grace period would only have one pull on their report.
On the other hand, a consumer shopping for a loan, a credit card and a checking account with overdraft would have three recorded pulls.
The one exception to the overdraft rule might be if a checking account pulls overdraft funds from a savings account or a CD where funds are already available, says Bill Valerian, chairman and CEO of Liberty Bank in Cleveland.
“(A bank) probably wouldn’t pull a report if the overdraft wasn’t tied to a loan or credit card, but it’s really at the bank’s discretion,” he says. “To be sure, the (consumer) should ask.”
Opening and closing accounts in pursuit of fleeting introductory deals could also damage a consumer’s relationship with the financial institution in question, says Jim Vigars, president and CEO of Sonoran Bank in Phoenix.
“When we give customers an offer, we’re trying to create a long-term relationship, not give them a one-time deal,” Vigars says. “If we find out that a consumer has been opening and closing a lot of accounts — especially small, $200, $300 accounts — that’s immediately a red flag to us.”
However, customers with reputable financial histories probably don’t have to worry too much about this, Vigars says. When opening a new account, banks frequently run a ChexSystems report which shows any accounts that have been overdrawn, mishandled or used in a check fraud scheme.
However, accounts that have been properly managed do not appear on the ChexSystems report, Vigars says. As a result, customers without financial blemishes can open and close accounts at will without it showing up on the ChexSystems report.
By contrast, those with previous account problems may have their entire financial history revealed without their knowledge.
“If we know through ChexSystems that a customer is chasing offers, we’ll monitor the account much closer,” Vigars says.
He adds that Sonoran “might also hold funds longer than we would otherwise,” in the accounts of such customers before clearing checks.
Valerian says customers with a reputation for holding short-term accounts could also run into trouble when seeking a long-term loan, mortgage or letter of recommendation.
“When we give a loan, especially at a smaller community bank, we take factors like character and how good our relationship with you has been into consideration,” he says.
“(Chasing yield) wouldn’t be a terrible thing, but it wouldn’t have a positive impact either.”
Vigars is quick to add that if the accounts are properly managed without being overdrawn, customers are free to open as many checking or savings accounts as they like without fearing they’ll be knocked out of the running for a loan or mortgage. They may, however, experience negative repercussions when it comes to qualifying for the best rates or lowest application or origination fees.
Even with all the drawbacks, chasing yield can be profitable. If executed with an eye on fees, credit score and a bank’s goodwill, it can put a moderate sum of free cash into the pockets of those who play the game well.
“If it’s done in a controlled way, it’s the American way to look for the highest yield and earn as much as you can,” Bonora says. “Customers just have to be careful.”