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The Price of Not Being Banked is Hundreds of Dollars per Year, Always one step further
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(image: http://www.imageafter.com/image.php?image=b17mattphilip071.jpg&dl=1)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 been writing about personal finance for more than 10 years. Tony started his career at NerdWallet as a writer and worked his way up to the position of assistant assigning editor, and then to lead editor. His writing has been featured on such publications as the Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.
Updated Sep 13 2016, 2016
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Banks can cause their fair share of headaches However, the lack of access to a bank can be even more detrimental to your financial health. In the absence of a financial institution that offers basic services like free check cashing and loans with reasonable rates of interest Unbanked customers depend on costly alternative financial service providers to cash their checks and cash out money orders. The accompanying fees cost these families hundreds of dollars each year.
Along with the higher day-to-day costs being a member of any credit union or bank can have negative long-term consequences. The unbanked household, which the FDIC defines as those that do not have an account with an insured institution, can't save money to create emergency funds. They are also unable to turn to tools that save time for things like paying bills or transferring funds.
"The conventional banking system remains out of reach for thousands of Americans," says Sean McQuay the NerdWallet's banking expert and credit expert. "While it may appear impossible to open the option of opening a bank account can be the first step towards breaking this cycle that sees us living from paycheck to paycheck, paving the way to financial independence."
A majority of households who don't have a bank account say the main reason is that they don't have enough money. The median income after tax for these households is $18,203, according NerdWallet's analysis of data taken from the Federal Deposit Insurance Corp. The high costs associated with alternative financial services only make the situation even more expensive.
But cheaper services are available and taking advantage of them can allow people to cut down on unnecessary expenses.
The key results
The annual average cost of not having a bank account is $196.50 for people who use the prepaid debit card which has direct deposit. That figure jumps to $497.33 when the card doesn't offer direct deposit.
People who deal only in cash face average annual costs of $198.83 for check cashing or money orders.
With approximately 9 million unbanked households in the United States, down from 9.5 million in 2013, the overall annual cost to the families of these households is between $1.8 billion between $1.8 billion and $4.5 billion.
In the absence of a bank account forces people to take advantage of other financial services. those who do not have a bank account are around six times more likely use costly .
Transacting off grid can be costly
"In many ways you can compare the needs of unbanked households with those of banked households," says John Thompson who is the senior vice-president of the Center for Financial Services Innovation an independent consultancy firm for financial services. Certain transactions require however for consumers who aren't banked, they don't happen through a bank, Thompson says. That's why they can be costly.
Consider cashing a check for instance. When done through a bank or credit union, the process is as easy as it is cheap. But that convenience vanishes in the event that you don't belong to a traditional financial institution, and alternatives is a bit pricey.
Check-cashing businesses generally charge between 1% to 10 percent of the value of a check, and that means unbanked consumers who don't carry a prepaid card that offers direct deposit will pay on average $182.03 per year to access their cash according to NerdWallet's study of FDIC information and using a fee of 1percent of the check's value. People who don't have bank accounts are around 6-fold more likely make use of check-cashing services than those who have.
"Relying on services such as check cashing and money orders can be costly and it's the Americans who can't afford these fees and inconveniences that find themselves unbanked," McQuay says.
Instead for checking account, many individuals utilize prepaid debit cards. They are offered at supermarket stores and other retailers like Target, Walgreens and Wal-Mart. This type of card is fairly uncomplicated: Users are able to spend only the amount of money they have loaded onto the card.
Costs of checking accounts
These accounts, with low overdraft charges and no monthly charges, charge customers about $30 annually. Checking accounts on average cost customers about $150 per year with monthly maintenance charges and two overdraft fees.
" relying on services such as cashier's checks and money orders is costly, and it's those Americans who are the least able to pay these costs and hassles who are left without a bank account. " Sean McQuay , NerdWallet expert in banking and credit
However Prepaid cards are generally thought to be more costly than traditional checking accounts. They cost an average of either $179.70 or $298.50 per year, depending on the card's a free direct-deposit service. If it doesn't, users have to pay high fees for cash loading. In addition, prepaid cards generally have either monthly fees or per transaction costs, along with ATM withdrawal fees.
Anyone who does not have either a checking account or a prepaid card faces average annual fees of $198.83 for cashing checks as well as money-order services.
Along with their expenses Prepaid cards also aren't without their flaws. They aren't able to be used to build credit and the law in the US doesn't require prepaid cards to offer fraud protection, as they do with standard debit cards. However, companies like American Express, Discover, MasterCard and Visa typically offer a specific amount of protection for purchases however, this doesn't include ATM and some online transactions.
Furthermore, the majority of checking accounts are insured by the federal government, which means that the account holders will not be able to lose any money, from $0 to $250,000, in the event that the bank went under. People who use prepaid debit cards have this protection when the card is issued by a bank, but even then it's possible that they won't get all of their money back. If they purchased their credit card from a company that isn't insured by the FDIC and this is not rare, the rules of the issuer determine the amount of protection offered and whether the card will be reimbursed.
Indirect costs impose their burden, too
The dangers of not having a bank account go beyond the expensive costs of other financial services. First, being unaffiliated to a bank takes extra time. Unbanked consumers who don't use prepaid cards don't have access to the many benefits of online and mobile banking, like automatic bill payment and free money-transfer services. Prepaid cards can offer these options, but they usually aren't free, unlike those offered by credit unions and banks.
"If you don't belong to an institution that offers financial services, you can't bank on what you do," Thompson says, adding that this may force people to miss work, hurting their paychecks. If employees have to travel to take care of money-related chores that require transportation, they'll incur expenses also, he says.
Not being able to use traditional banking products can be detrimental in other ways as well. A bank gives people access to tools to assist them in maintaining or improving the health of their finances, like certificates of deposit, protected credit cards. These can, for example, help them create an emergency fund as well as increase credit, which can reduce the requirement for expensive payday loans.
The average of the amount borrowed through payday lenders is just $350 as per a report , a sum that people who are members of a bank or credit union can build by using a savings account, or a secured credit card to pay for. That will allow the borrower to stay away from the risk of taking out loans, which have median interest rates of around .
With the help of savings accounts and secured cards, it's easy to maintain a healthy credit score. In addition, the costs of borrowing are much lower; the most well-known secured credit cards generally have interest rates at around 20%.
"We have systems that allow us to create information about past credit habits," says Gregory B. Fairchild Associate Professor of administration for business of the University of Virginia Darden School of Business. "Absent this information, the real cost for people will be that they're constantly at risk."
"Everyone's a risk," he says, however, the risk for those without credit histories "is extremely uncertain."
And that risk can have a trickle-down effect into different areas of people's lives which could affect their ability to get loans , get credit cards or even begin a business.
If they don't have a credit record, entrepreneurs with small businesses have a harder time getting credit lines, according to Tara Robinson, chief development officer at Mission Asset Fund, a non-profit organization that provides loans as well as other products for underserved families. A lack of credit history can therefore limit people's earnings potential, she says.
"You kind of get stuck before you begin," Robinson says.
Better options for unbanked consumers
If you do not have a bank account, it may seem like expensive alternatives financial services are the only choices. But that's not necessarily the situation. Here are some ideas that are worth considering.
Take advantage of second-chance checking: If you have had an account closed or a check bounced, or you shut down an account prior to paying a bank fee you could be listed on a consumer report agency. A negative record is typically all it takes for the bank to reject your request for opening a new account.
However, some banks have second-chance accounts for checking. They eliminate the requirement to use check-cashing services and money orders, both of which costs unbanked customers about $17 per year. They are accessible to people listed in ChexSystems and are able to be used to establish a clean banking history. If you've accomplished this, you should consider opening an account with a savings option to help you build and better manage your emergency funds. For opening either account, you'll have to present proof of identity and you may be required to make an initial deposit between $10 and $100.
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You can get a secured credit card: With secured cards you make an amount of money, usually at least $200 or $300 that you later borrow against. After using a secured card in a responsible manner for about a year, you might be given an opportunity to upgrade to a regular credit card.
Perhaps more importantly is that you'll have improved your credit score during the process, making you more attractive to lenders. That's, of course, that you make your monthly installments punctually and completely.
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Join a lending circle or join a small, community lender: Borrowing money and repaying it on time improves your credit rating, and using traditional loans from banks and credit unions isn't your only option. Mission Asset Fund, Robinson's employer, oversees and manages lending circles, which provide an exclusive type of zero-interest loan.
"Each loan is typically around $1,000," Robinson says. "You are a group of 10 people who come together and contribute $100 each month, with one getting the loan each month. The process continues until everyone gets an loan."
As with most companies that manage lending circles, Mission Asset reports repayment behaviors to credit bureaus monthly. For those with poor credit, who make their payments on time can improve their scores to about 700 after just six months, Robinson says.
"It's an opportunity for folks with no credit scores to establish credit quickly , and for those who have damaged scores , to assist in beginning to rebuild them with a positive line of credit," she adds.
Find out if there's an existing community lender or a non-profit in your city that facilitates these types of loans or similar financial services.
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The financial mainstream is about to enter
From checking out checks to using savings accounts, the reasons why people turn to banks may not be thrilling. In the end, however, banks serve as important pillars in families their financial lives. If you're not able to access to a bank managing your finances and managing your financial chores can be harder and probably more costly.
That's why second-chance checking accounts, secured credit cards, community lenders and lending circles important. They allow families access to traditional financial services that they could otherwise miss out on, thus paving the way to a more secure financial future.
NerdWallet analysts of data Sreekar Jasthi and writer Spencer Tierney participated in this study.
METRODOLOGY
To determine the median income for households with no bank accounts using data from the 2015 FDIC national survey of Underbanked and Unbanked Households. The survey revealed that 77% of households had no bank accounts. To determine the check-cashing costs for unbanked households who use prepaid debit cards that do not require direct deposit, and for households using only cash we assumed two checks which were cashed every month as well as a 1% cost of the total amount of the check. We also assumed one money order sent per month with an average fee 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. In the case of a typical bank account with a checking balance, we assumed two overdrafts per calendar year at a cost of $30 each and maintenance fees of $7.50 monthly. To determine the average cashing of checks and money order fees using the FDIC's data on what frequency alternative financial services used by each kind of household (banked or non-banked) and then added the less frequent usage among households with bank accounts to the costs averaged.
For the calculation of the annual average cost of prepaid debit cards we looked at 69 cards, based on the major issuers, high searches, Pew Charitable Trust's and the card offerings listed on and 's websites. For cards with several plans, we considered each plan as an individual card.
The report covers the annual costs associated with a prepaid debit card with direct deposit and without direct deposit for payroll. The median monthly fee used was $4.98, and the median out-of-network ATM fee used was $2.50. We used the maximum cash load fee of $4.95.
If you choose direct deposit we assumed 12 monthly fees as well as two non-network ATM charges per month. For the alternative that doesn't require direct deposit we assumed 12 monthly fees as well as four ATM fee per month plus two cash-load charges each month. Signature- and PIN-based purchase transaction fees typically don't apply to cards that have monthly charges, which is why they were excluded.
About the author: Tony Armstrong is a banking editor at NerdWallet. The work of Tony Armstrong has been covered on the Los Angeles Times, Mashable and USA Today.
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