Downsides of Checking Account Bonuses - When Is It Not Worthwhile?

With interest rates so low these days, you may be able to earn more with checking account bonuses if your savings is small. However, there are several downsides to consider. Yesterday I came across this Bankrate article on 5 hidden costs of checking-account bonuses. Some of the hidden costs mentioned were more related to time and work. In our blog post on bank bonus gotchas, we described the common strings attached to many bonus offers like direct deposit and debit card usage.

Another potential gotcha mentioned in the Bankrate article is taxes. Most banks will consider the value of the bonus as interest and include it on your 1099-INT. So you'll have to pay income taxes on the bonus, and that includes the value of non-cash bonuses. One risk not mentioned in the article is if the bank values the non-cash bonus higher than what it's worth. For example, if the bank reports a gift value of $200 and your marginal tax rate is 28%, it will cost you $56 in federal income tax. If you could have bought the gift for only $100, your net bonus after taxes is only $44 ($100 - $56).

One potential gotcha not mentioned in the Bankrate article was described in detail in our bank bonus costs article. That's the potential effect on your credit score and on being approved for new bank accounts. Many banks will do a hard credit inquiry when you open a bank account, and this can temporarily ding your credit score.

In addition to a hard credit pull, many banks use ChexSystems when you apply. This is done primarily to ensure you have not abused checking privileges at past banks (like by bouncing checks). However, banks have used ChexSystems to see how many accounts you have recently applied for at other banks. If they see you have applied for multiple bank accounts, they may decide to reject your application. Many readers have reported this problem.

With these hidden costs in mind, you should pick your bank bonuses carefully. Is the value of the gift worth it? Also, will the account provide value to you without regard to the bonus? Do you have any other tips for deciding on bank bonuses?

That brings me to a new poll question. How large does a checking account bonus have to be for it to be worth applying for? Assume the bonus is in cash and the requirements are relatively easy.