November issue offers more rewarding ways to beef up savings

YONKERS, NY — In these tough economic times, bank programs designed to help consumers save money by making purchases with a debit or credit card can be tempting, but the Consumer Reports Money Lab found the benefits can be quite minimal.    

In its latest report, the Consumer Reports Money Lab took a look at three of the more well-known spend and save programs: Bank of America’s Keep the Change, Wachovia’s Way2Save and American Express One. CR found all three were limited and perhaps more rewarding options exist.  

“Saving money can be tough. These programs offer the hope that something good can come from spending more, but when we crunched the numbers, we found the overall savings to be limited,” said Noreen Perrotta, Consumer Reports money editor.

Bank of America’s Keep the Change program rounds every debit card transaction up to the nearest dollar and transfers the amount to a linked savings or money market account. Consumer Reports found that customers could do better saving in accounts that pay a higher interest rate. 

Assuming the average transaction is $.50, consumers would have to make 1,728 debit purchases in the first year to get the maximum $250, according to Bank of America’s online calculator. But in year two, the amount matched drops, and they would have to make 10,000 transactions to get the $250.
 
At the time of this analysis, Bank of America paid a paltry 0.20 percent interest, and the money-market account paid 1.75 percent on deposits of less than $5,000, at a time when many online savings accounts were paying more than 3 percent. And if an automatic transfer would result in an overdraft, savers could be socked with a $25 fee unless they sign up for overdraft protection, which reduces it to $10 each time.

Wachovia’s Way2Save sets up linked savings and checking accounts. Wachovia moves $1 from checking to savings for every debit purchase or paying a bill online. CR's take, the program isn’t going to add much to your net worth. 

The bank pays 5 percent interest on the savings account for the first year and a 5 percent bonus on the savings balance at the end of the year. At the start of year two, it drops to 2 percent interest and a 2 percent bonus. Additional deposits into the account are limited to $100 a month.

Customers who transfer $100 a month into savings will earn $92 in interest and bonuses the first year, in addition to the $1 transfers from debit transactions. But to get the maximum $300 bonus, you’d have to deposit $1,200 and make 4,800 transactions in the first year. The bonus is paid for three years and is taxable.

The American Express One credit card pays 1 percent cash back on purchases and a $50 bonus after the first purchase. The cash goes into a savings account, which recently paid 2.75 percent. There’s no limit on the rewards consumers can earn. And the card doesn’t charge interest on new purchases, only on the previous month’s balance. But a $35 annual fee kicks in after the first year, so you’d have to charge $3,500 to break even. Consumers might do better with a card with greater rewards—CR found that some pay 3 percent or more for various categories of spending.

For those looking for better ways to beef up savings and perhaps earn greater rewards, Consumer Reports recommends the following alternatives: 

• Direct deposit. Have part of your paycheck deposited directly into a high-yield online savings account that charges no fees, like the one at HSBC, which recently earned 3.5 percent interest and has a free linked interest-bearing checking account.
• Automatic investments. Many employers allow for direct deposit into more than one account. Have money sent to an IRA, a 529 college savings plan, and investment accounts, for example. T. Rowe Price allows systematic contributions of as little as $50 in its IRAs or mutual funds instead of the usual $1,000 to $2,500; at Fidelity, it’s $100 instead of $2,500 or more. For 529s, it’s often lower, like $25.
• Cash-back credit card. Use a cash-back credit card with higher rewards for categories in which you spend the most, such as gas or groceries. Get one that gives the cash rewards as a check or as a credit toward the next month’s purchases. Avoid cards that have low limits on the amount that can be earned.

For more information on spend and save programs, the complete report is available in the November issue of Consumer Reports, on sale October 7 and online at www.ConsumerReports.org.