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The Price of Not Being Banked is Hundreds of Dollars per Year, Always One Step further

 

 

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The Price of Not Being Banked Costing Hundreds of Dollars Every Year, Always One Step further

 

By Tony Armstrong Lead Assigning Editor | Banking Tony Armstrong leads the banking team at NerdWallet. He has been writing about personal finances for over a decade. Tony began his NerdWallet career as a journalist and worked his way up to the position of assistant assigning editor, and then to lead editor. Writing by him has also been highlighted on such publications as the Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.

 

 

 

 

 

 

Updated September 13th 2016, 2016

 

 

 

 

 

 

 

 

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Banks can bring about a fair amount of headaches However, not having access to one can be even more detrimental to your financial health. If you don't have access to a financial institution that offers basic services such as free check cashing and loans with reasonable interest rates Unbanked customers have to rely on other financial-service providers to cash their checks and cash payments on money-orders. These fees can cost households hundreds of dollars per year.

 

In addition to the significant daily costs, not belonging to an institution like a credit union or bank has harmful long-term effects. Unbanked households, as the FDIC defines as those that don't have an account at an insured institution, cannot save money to create emergency funds. They are also unable to turn to time-saving tools for things like paying bills or transferring funds.

 

"The bank system that is traditional is beyond the reach of thousands of Americans," says Sean McQuay, NerdWallet's banking as well as credit specialist. "While it may appear impossible but having the option of opening a bank account can be the first step to break the cycle of living paycheck to paycheck, paving the way to financial independence."

 

More than of households that do not have the luxury of a bank account say the main reason is that they do not have enough money. The average post-tax income 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 alternative financial services only make things worse.

 

However, there are cheaper options available, and taking advantage of them can help people reduce the amount of unnecessary expenditures.

 

The key conclusions

 

The annual average cost of having no bank account is $196.50 for people who use an prepaid debit card that features direct deposit. This figure increases to $497.33 when the card doesn't provide direct deposit.

 

Individuals who are only dealing in cash are subject to annual expenses of $198.83 for cashing checks or money orders.

 

With a total of 9 million unbanked households living in the United States, down from 9.5 million in 2013, the aggregate annual cost for the families of these households is between $1.8 billion and $4.5 billion.

 

In the absence of an bank account forces people to use alternative financial services; unbanked consumers are about 6-fold more likely to make use of expensive .

 

 

Transacting "off grid" is expensive

 

"In many respects you can compare the needs of unbanked households with those of banks," says John Thompson the senior vice president of the Center for Financial Services Innovation an independent financial services consulting firm. 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.

 

Take cashing a check, for example. When done via a credit or bank union, the task is as easy as it is inexpensive. But that convenience vanishes if you don't belong to a traditional financial institution, and the alternative could be a hefty price.

 

Check-cashing firms typically cost between 1% and 10 percent of the value of a check which means that unbanked customers who don't have an prepaid card with direct deposit, pay the equivalent of $182.03 per year to access their funds as per NerdWallet's study of FDIC information and using the fee is 1percent of the amount of the check. Customers who don't have banking accounts are around 6-fold more likely to make use of check-cashing services than those who have.

 

"Relying on services such as cashing checks and money orders is expensive, and it's those Americans who can least afford the cost and inconvenience that find themselves unbanked," McQuay says.

 

In lieu for checking account, many individuals make use of debit cards that are prepaid. They are offered at supermarket shops and at other stores like Target, Walgreens and Wal-Mart. This type of plastic is fairly uncomplicated: Users can only spend the amount they have loaded onto the card.

 

Costs for checking account

 

The accounts, which are able to pay lower overdraft fees and no monthly fees, charge customers about $30 annually. Checking accounts on average costs customers around $150 annually after taking into account the monthly maintenance fees and two overdraft charges.

 

" Having to rely on services like check cashing and money orders is expensive, and it's those Americans who are the least able to pay the costs and inconveniences of these services that find themselves unbanked. " Sean McQuay , NerdWallet banking and credit expert

 

 

However, prepaid cards tend to be more costly than regular checking accounts, costing users an average of either $179.70 or $298.50 annually, based 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 an account for checking nor an prepaid card will be charged annual charges of $198.83 for cashing checks and money order services.

 

On top of their costs In addition, prepaid cards come with other drawbacks. 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 with standard debit cards. However, companies like American Express, Discover, MasterCard and Visa typically offer a specific amount of protection for purchases, although this won't cover ATM and certain online transactions.

 

Furthermore, the majority of checking accounts are guaranteed by the government. This means that the account holders will not lose money, up to $250,000, should the bank were to go under. People who use credit cards with a prepaid option get this kind of protection if they're issued by a bank, however, even if they do it's possible that they won't get the entire amount back. If they got their plastic from a company that isn't insured by the FDIC and this is not common, the rules of the issuer determine the amount of protection they offer and whether they'll be reimbursed.

 

Indirect costs impose their burden also.

 

The dangers of not having the benefit of having a bank account go beyond the cost-intensive alternative financial services. For one, not belonging to a bank can take up time. Unbanked consumers who don't use prepay cards aren't able to access to the many advantages of mobile and online banking, for example, automatic bill payments and no-cost money-transfer services. Prepaid cards can offer these options however they aren't free, unlike those offered by credit unions and banks.

 

"If you don't belong to an institution of financial service, you can't bank on what you do," Thompson says, noting that this could force people to take time off work, which can affect their earnings. If employees have to travel for the sake of financial obligations and travel, they will incur costs for transportation, too, he notes.

 

Not being able to use the standard banking services can hurt people in other ways, too. The bank provides access to tools that help them maintain or improve the health of their finances, including , certificates of deposit and secure credit cards. These , for example, can aid in the creation of an emergency fund or build credit, which reduce the requirement for expensive payday loans.

 

The average of the amount borrowed through payday lenders is just $350, according to a the report. This is a figure that those who belong to a bank or credit union could build by using a savings account, or use a secured credit card to cover. That would allow the borrower to stay away from the risk of taking out loans that have median interest rates of around .

 

With secured and savings cards, it's easy to maintain a healthy credit score. The costs of borrowing are less; the most popular secured credit cards typically offer rates of interest about 20%..

 

"We have systems that allow us to generate data on people's credit behavior," says Gregory B. Fairchild who is associate professor of administration for business at the University of Virginia Darden School of Business. "Absent this data, the very real cost that people face will be that they're constantly at risk."

 

"Everyone's an individual risk," he says, but the risk for people with no credit history "is extremely uncertain."

 

This risk could have an impact that can trickle down into different areas of people's lives, harming their ability to get loans , get credit cards and even to start an enterprise.

 

If they don't have a credit record, entrepreneurs with small businesses will have a difficult time obtaining lines of credit, says Tara Robinson, chief development officer at Mission Asset Fund, a non-profit that offers loans and other financial products for previously unserved families. The absence of a credit history could restrict the potential of earning as she explains.

 

"You are a bit stuck before you start," Robinson says.

 

Better options for unbanked consumers

 

If you do not have a bank account, it may seem as if expensive alternative financial services are your only alternatives. But that's not necessarily the case. Here are some strategies that are worth considering.

 

Utilize second-chance checking If you've experienced a check bounce or closed an account before paying a bank charge, you may be listed in a consumer report agency. A negative record is typically the only thing that can cause the bank to reject your application for a new account.

 

But some financial institutions offer second-chance checking accounts. They eliminate the requirement to make use of check-cashing service and money orders, both of which are priced at about $17 per year. These products are available to those who are listed on ChexSystems and are able to be used to establish the integrity of your banking records. After you've done that, consider opening an account with a savings option to help you create and better manage your emergency fund. For opening either account, you'll need show proof of identification, and may be asked to deposit an initial amount that ranges from $10 to $100.

 

>> MORE:

 

Get a secured credit card: With secured credit cards you pay an amount of money, usually at least $300 or $200 that you then borrow against. Once you've used your secured card responsibly for about one year, you might be offered an upgrade to a credit card.

 

In addition is that you'll have improved your credit score in the process, which makes you more attractive to lenders. That's assuming you, of course, you make your monthly payments on time and in full.

 

>> MORE:

 

Join a lending circle or join a small, community lender: Borrowing money and paying it back in time can improve your credit, and taking out traditional loans from banks and credit unions aren't the only choice. 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 dollars," Robinson says. "You have 10 people working together, and they each contribute $100 each month, with only one getting the loan each month. It rotates around until everyone receives the loan."

 

Like most organizations that oversee lending circles, Mission Asset reports repayment behaviour to credit bureaus on a monthly basis. For those with poor credit, who make their payments on time can improve their scores by averaging 600 after only 6 months Robinson says.

 

"It's an excellent opportunity for those with no credit scores to get credit fast and for those who have damaged scores to help start to rebuild them with an unsecured line of credit," she adds.

 

Check to see if there's a local community lender or non-profit organization within your town that offers these kinds of loans or similar financial services.

 

>> MORE:

 

Incorporating the mainstream financial system

 

From depositing checks to using account savings, some of the motives why people use banks might not sound particularly exciting. However, in the end, banks serve as important elements in families' financial lives. If you're not able to access to one managing your finances and managing your financial chores can be harder and most likely to be more expensive.

 

That's why second-chance checking accounts, secured credit cards, community lenders and lending circles extremely valuable. They allow families access to financial services that they would otherwise miss out on, thus opening the way to better financial security.

 

NerdWallet Data analyst Sreekar Jasthi and writer Spencer Tierney were the authors of this study.

 

METHODOLOGY

 

To calculate the average income for households with no bank accounts, we used data taken from 2015's FDIC National Survey of Underbanked and Unbanked Households. It was revealed that 7percent of households were unbanked. To determine the check-cashing costs for households that are not banked using prepaid debit cards without direct deposit or for those with cash only We assumed two paychecks which were cashed every month and a 1% fee of the check's total value. We also assumed one money order each 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. In the case of a typical bank account with a checking balance, we assumed two overdrafts per year at a cost of $30 each, and the maintenance fee of $7.50 monthly. To calculate average check cashing and money order fees using the FDIC's statistics on how often alternative financial services use by type of household (banked or not banked), then applied the lower frequency of the use of banks by households to the costs averaged.

 

To calculate the average annual cost of debit cards that are prepaid, we looked at 69 cards, which were based on the major issuers, high search volumes Pew Charitable Trust's, as well as the offerings of cards on their websites and. If cards have several plans We considered each plan as a distinct card.

 

The study includes the annual cost of an prepaid debit card direct deposit and without direct deposit for payroll. The median monthly fee used was $4.98 and the median out-of-network ATM fee was $2.50. We used the maximum cash load fee of $4.95.

 

For the direct deposit option, we assumed that there would be 12 monthly fees as well as two non-network ATM costs per month. In the case of the non-direct deposit option we assumed 12 month fees and 4 ATM charges per month, and two cash load fees per month. PIN- and signature-based purchase transaction fees usually don't apply to cards that have monthly fees, so they were not included.

 

 

 

 

Author bio Tony Armstrong is a banking editor at NerdWallet. His work has been covered in The Los Angeles Times, Mashable and USA Today.

 

 

 

 

 

 

 

 

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