A bank bonus is a one-time cash reward for opening an account and meeting its terms. An APY cut is when the bank lowers the interest rate it pays on your balance. A bonus usually makes more sense when it is larger than the interest you would lose by keeping money in a lower-paying account. If the rate cut costs you more over the time your money has to stay put, the bonus is not worth it.
Annual percentage yield (APY) is the yearly return on a deposit, with compounding included. Many readers face this choice when a bank offers a big sign-up bonus on an account that pays less interest than their current savings account. They also face it when a bank cuts its rate soon after they join. The questions below show how to compare the two with your own numbers.
Table of Contents
- How Do You Compare a Bonus Against Lost Interest?
- What Happens When the Bank Cuts the APY After You Sign Up?
- Which Offer Terms Change the Answer?
- How Do Taxes Affect the Comparison?
- When Does a Smaller Deposit or Split Strategy Work Better?
- Frequently Asked Questions
How Do You Compare a Bonus Against Lost Interest?
Start with the gap between the two rates, not the rates themselves. Multiply that gap by the amount you must deposit. Then scale it to the months the money has to stay in the account. The result is the interest you give up. Here is an example. Say a bonus requires you to keep $10,000 in an account paying 1% for 90 days, and your current savings pays 4%.
The 3-point gap on $10,000 comes to about $300 a year, or roughly $75 over three months. A $300 bonus beats that easily. A $50 bonus does not. Count the whole period your money is tied up. Some offers pay the bonus weeks after you meet the terms. Others take the bonus back if you close the account early. Both stretch the time your money earns the lower rate.
What Happens When the Bank Cuts the APY After You Sign Up?
Savings and checking account rates are usually variable. Banks can change them at any time, and they often move with the Federal Reserve's policy rate. A high rate advertised next to a bonus is not a promise to keep paying it. A rate cut does not undo a bonus you have already earned.
It does change your math if the money still has to sit there to meet a holding period. Run the comparison again with the new rate. A cut late in a holding period costs little, while a cut early in a long one can use up much of the bonus. Once the bonus posts and any early-closure window has passed, a lower rate is simply a reason to move your money. Nothing keeps you in the account after that except fees or convenience.
Which Offer Terms Change the Answer?
The headline bonus amount rarely tells the whole story. Check these terms before comparing numbers: Fees count as lost value, just like lost interest.
A $15 monthly fee over four months takes $60 off the bonus. Add fees to your lost interest before deciding.
- Minimum deposit and how long it must stay in the account
- Whether "new money" is required, meaning funds moved from another bank
- Direct deposit requirements, including the amount and how many deposits you need
- Monthly maintenance fees and what waives them
- Early closure rules that let the bank take back the bonus
How Do Taxes Affect the Comparison?
In the United States, banks generally report cash bonuses as interest income. That usually comes on Form 1099-INT, though some banks use 1099-MISC. Interest earned on a savings account is taxed the same way.
Because both are usually taxed as ordinary income, the tax roughly cancels out when you compare them. A $300 bonus and $300 of interest leave you with about the same amount after tax. The comparison changes if the money you would move sits in a tax-advantaged account, or if the bonus is paid in a form that is taxed differently.
When Does a Smaller Deposit or Split Strategy Work Better?
You rarely need to move all your savings to earn a bonus. Deposit only the minimum the offer requires and keep the rest in your higher-yield account. That keeps your lost interest to the smallest possible amount.
Checking account bonuses often depend on direct deposits, not on a large balance. For these offers, the lower APY barely matters, because little money sits in the account. The real costs are the time spent and any fee you might trigger. Some people route part of a paycheck to the new account only until the bonus posts.
Frequently Asked Questions
Can a bank change the APY during a promotional period?
Usually yes, unless the terms promise a fixed promotional rate for a set time. Read the rate section of the account agreement to check.
Is a certificate of deposit (CD) protected from APY cuts?
A CD's rate is normally fixed until it matures. Withdrawing early usually costs an early withdrawal penalty, which counts against any bonus.
Should I keep the account open after the bonus posts?
Keep it open at least through the early-closure window in the terms. After that, compare its rate and fees with your other options before leaving money there.
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