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If Instant Same Day Payday Loans Online Is So Bad, Why Don't Statistics Show It?
The Price of Not Being Banked Costing Hundreds of Dollars Every Year, Always one step Behind
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The cost of not having a bank account is Hundreds of Dollars per Year, Always One Step behind.
by Tony Armstrong Lead Assigning Editor | Banking Tony Armstrong leads the banking team at NerdWallet. He has covered personal finances for over a decade. Tony began his NerdWallet career as a writer and worked his way up to assistant assigning editor and later to lead editor. The writing of Tony has been featured in such publications as the Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.
Updated on Sep 13 in 2016
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Banks may be the cause of a lot of problems however, the lack of access to a bank is worse for your financial wellbeing. In the absence of an institution that provides basic services, such as check cashing , and loans that have reasonable interest rates, unbanked consumers depend on costly alternative financial service providers to cash checks and take out money orders. The accompanying fees cost these families hundreds of dollars each year.
On top of the high cost of living, not belonging to a bank or credit union can have negative long-term consequences. Unbanked households, as the FDIC defines as households that don't have an account at an insured institution, can't use savings accounts to build emergency funds and can't turn to time-saving tools for transactions like paying bills or transferring funds.
"The traditional banking system remains out of reach for millions of Americans," says Sean McQuay the NerdWallet's banking expert experts and expert on credit. "While it may seem like a daunting task to open an bank account can be the first step towards breaking this cycle that sees us living from paycheck to paycheck, and thus pave the way to financial independence."
More than of households that don't have the luxury of a bank account say the main reason is they do not have enough money. The median income after tax of these households is $18,203 according to NerdWallet's analysis of the data taken from the Federal Deposit Insurance Corp. The high costs associated with other financial services can only make matters more difficult.
There are also cheaper options and taking advantage of them can help people reduce unnecessary expenses.
Key findings
The average annual cost of having no bank account is $196.50 for those who have an prepaid debit card that includes direct deposit. The cost increases to $497.33 when the card doesn't provide direct deposit.
People who deal only with cash have annual costs of $198.83 for check cashing and money order services.
With approximately 9 million unbanked households in the United States, down from 9.5 million in 2013, the overall annual cost for these families is between $1.8 billion between $1.8 billion and $4.5 billion.
The absence of an bank account forces people to take advantage of other financial services. unbanked consumers are about 6 times as likely to make use of expensive .
Transacting "off grid" is expensive
"In many respects, you can equate the needs of unbanked households to those of households that are banked," says John Thompson, senior vice president at the Center for Financial Services Innovation which is a non-profit consultancy firm for financial services. Certain transactions require in order to be completed, but for those who don't have bank accounts, they don't happen through the bank, Thompson says. That's why they can be expensive.
Consider cashing a check for example. If you do it by a bank or credit union, the procedure is as simple as it is affordable. But that convenience vanishes if you don't belong to the traditional financial institution and alternatively, it can be hair-raisingly expensive.
Check-cashing companies typically charge between 1% and 10 percent of the value of a check which means that unbanked customers who don't have a prepaid card that offers direct deposit, pay an average of $182.03 per year just to access their funds, according to NerdWallet's analysis of FDIC data , and taking a fee of 1percent of the value of the check. People who don't have bank accounts are 6 times more likely use check-cashing services than people who have.
"Relying on services such as check cashing and money orders can be costly and it's the Americans who can't afford the cost and inconvenience that find themselves unbanked," McQuay says.
Instead for checking account, many customers make use of pre-paid debit cards. These can be found at grocery shops and at other stores like Target, Walgreens and Wal-Mart. This kind of plastic is relatively simple to use: Users can only spend the amount they have loaded onto the card.
Costs of checking accounts
These accounts, with less overdraft fees and have free monthly fees, will charge customers about $30 annually. A typical checking account costs customers about $150 per year after taking into account the monthly maintenance fees and two overdraft charges.
" Relying on services like money orders and check cashing is costly, and it's the Americans who can least afford these costs and hassles who find themselves unbanked. " Sean McQuay , NerdWallet banking and credit expert
However the prepaid cards tend to be more expensive than traditional checking accounts. They cost the equivalent of $179.70 or $298.50 annually, based on the card's the option of direct deposit for free. If it does not, cardholders face steep cash-loading fees. Also, prepaid cards typically come with monthly or per-transaction costs, along with ATM withdrawal charges.
A person who uses neither either a checking account or a prepaid card faces average annual fees of $198.83 for cashing checks and money order services.
In addition to their cost Prepaid cards also have other shortcomings. They aren't able to be used to build credit and the law in the US does not require prepaid cards to provide protection against fraud, like they do for standard debit cards. However, companies like American Express, Discover, MasterCard and Visa generally offer a certain number of protections for purchases but they don't offer protection for ATM and some online transactions.
What's more, most checking accounts are backed by the government, which means account holders wouldn't be able to lose any money, from $0 to $250,000, in the event that the institution went bankrupt. The people who use credit cards with a prepaid option are protected if their card is made by a banking institution, but even then they might not receive all of their money back. If they got their plastic from an issuer that's not insured by the FDIC and this is not uncommon, the issuer's rules determine the level of protection and whether they'd be paid back.
Indirect costs are a major factor, too
The pitfalls of not having the benefit of having a bank account go beyond the high costs of alternative financial services. First, being unaffiliated to a bank takes extra time. Unbanked consumers who don't use prepay cards aren't able to access to the numerous conveniences that come with mobile and online banking, like automatic bill payment and free money-transfer services. Prepaid cards might offer these options but they're not available for free, as are those provided by banks and credit unions.
"If you don't belong to an institution that offers financial services it isn't possible to bank on what you do," Thompson says, saying that this can force people to take time off work, which can affect their pay. If someone has to travel to take care of money-related chores, they incur transportation costs as well, Thompson says.
Being unable to utilize standard banking products hurts people in different ways, too. Banks provide access to tools that aid them in maintaining or improving their overall financial condition, such as deposits, certificates of deposit, and protected credit cards. They can, for instance assist in creating an emergency fund or develop credit, which will reduce the need for costly payday loans.
The average amount borrowed from payday lenders is just $350 as per a report the report. This is a figure that those who are members of a bank or credit union can build using a savings account or use a secured credit card to cover. That would allow the borrower to stay away from predatory loans which carry average interest rates of about .
With secured and savings cards, it's easy to maintain a healthy credit score. And the cost of borrowing is much less; the most popular secured credit cards typically have rates of at around 20%.
"We have technology that allows us to create data on people's credit habits," says Gregory B. Fairchild who is associate professor of administration for business in the University of Virginia Darden School of Business. "Absent these information, the real cost for people is that they're always at risk."
"Everyone's a chance," he says, however, the risk for those without credit histories "is highly uncertain."
And that risk can have an effect that trickles down to other areas of people's lives and affect their ability to take out credit cards, obtain credit and even start an enterprise.
Without a credit history entrepreneurs of small enterprises will have a difficult time obtaining credit lines, according to Tara Robinson, chief development officer at Mission Asset Fund, a non-profit that offers loans as well as other products for unserved families. The absence of a credit history can therefore restrict the potential of earning, she says.
"You are a bit stuck before you can even start," Robinson says.
Better options for consumers who aren't banked
If you do not have a bank account, it may seem as if expensive alternative financial services are your only alternatives. However, this isn't the case. Here are some strategies that are worth considering.
Utilize second-chance checking: If you have had a check bounce or closed an account before paying a bank fee, you may be included in a consumer report agency. A negative report is usually all it takes to get the bank to reject your application for opening a new account.
However, some banks offer second-chance checking accounts. These accounts eliminate the need to utilize check-cashing services or money orders, the latter of which are priced at around $17 annually. The products are accessible to people listed in ChexSystems. They can be used to re-establish an impeccable banking record. If you've accomplished that, think about opening an account for savings to help build and better manage your emergency funds. To open either account, you'll need show proof of identification, and may be asked to make an initial deposit of anywhere from $10 to $100.
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You can get a secured credit card: When you purchase a secured card you make an amount of money, usually at least $300 or $200, which you can then use to borrow. Once you've used your secured card responsibly for about one year, you could be given an opportunity to upgrade to a standard credit card.
Most importantly, you will have improved your credit score during the process, which makes you more appealing to lenders. This is assuming you, of course, you pay your monthly bills punctually and completely.
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Join an lending circle or work with a small community lender The process of borrowing money and paying it back punctually improves your credit rating, and borrowing traditional loans from banks and credit unions isn't your only option. Mission Asset Fund, Robinson's employer, manages and facilitates lending circles, which offer an exclusive type of zero-interest loan.
"Each loan is typically around $1,000," Robinson says. "You have 10 people working together and make a contribution of $100 per month, with one person getting the loan every month. The process continues until everyone is able to get their loan."
Like many organizations that supervise the lending circle, Mission Asset reports repayment behaviour to credit bureaus on a monthly basis. Anyone with no credit history who pay punctually can raise their scores to about 700 after just 6 months Robinson says.
"It's an opportunity for those with no credit scores to build credit fast and for those who have damaged scores , to assist in beginning building them up with a positive line of credit," she adds.
Look for any local community lender or a non-profit within your town that offers these kinds of loans or similar financial services.
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Incorporating the mainstream financial system
From depositing checks to using account savings, some of the motives that people turn to banks may not sound thrilling. Ultimately, though banks play an important role as foundations for families their financial lives. If you're not able to access to one, managing your money and taking care of daily financial obligations can be difficult and most likely to be more costly.
That's why second-chance checking accounts and secured credit cards community lenders and lending circles so valuable. They allow families access to financial services that they might otherwise be missing out on, thus paving the way to an improved financial security.
NerdWallet analysts of data Sreekar Jasthi and writer Spencer Tierney contributed to this study.
METRODOLOGY
To calculate the average income for unbanked households using information from the 2015 FDIC national survey of Underbanked and Unbanked Households. The survey found that 7% of households were unbanked. To calculate the cost of cashing checks for unbanked households using prepaid debit cards without direct deposit and unbanked households with cash only, we assumed two paychecks which were cashed every month as well as a 1% cost of the check's total value. We also assumed one money order sent per month with an average cost of $1.40.
For banking costs associated with using a NerdWallet-recommended checking account, we assumed two overdrafts per year costing $15 each and no other fees. For the average checking account, we estimated two overdrafts a year for $30 each as well as maintenance charges that are $7.50 monthly. To calculate average check cashing and money order charges, we used the FDIC's statistics on what frequency alternative financial services utilized by the households of different types (banked or not banked) and then used the lower frequency of use among banked households to the average costs.
To calculate the average annual cost of prepaid debit cards, we examined the 69 cards we examined, based on major issuersand high search volumes, Pew Charitable Trust's and the cards listed on the websites of and. For cards that offer different plans we included each plan as an individual card.
The report covers the annual costs associated with an prepaid debit card and without direct deposit for payroll. The median monthly fee was $4.98 The median out-of-network ATM cost was $2.50. We employed the maximum cash load fee of $4.95.
If you choose direct deposit we assumed 12 monthly fees along with two outside-of-network ATM costs per month. In the case of the non-direct deposit option we assumed 12 month fees and the four ATM fees per month and two cash load fees per month. Signature- and PIN-based purchase transaction fees are typically not applicable to cards that have monthly charges, which is why they were excluded.
The author's bio: Tony Armstrong is a banking editor at NerdWallet. His work has been highlighted on The Los Angeles Times, Mashable and USA Today.
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