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The Price of Not Being Banked: Hundreds of Dollars a Year, Always one step behind.
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The Cost of Being Unbanked: Hundreds of Dollars a Year, Always One Step behind.
by Tony Armstrong Lead Assigning Editor | Banking Tony Armstrong leads the banking team at NerdWallet. He has been covering 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 eventually to lead editor. His writing has been featured in The Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.
Updated Sep 13th in 2016
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Banks can cause their fair share of headaches However, not having access to one is worse for your financial wellbeing. Without access to an institution offering basic services like free check cashing , and loans that have reasonable interest rates Consumers who are not banked have to rely on other financial-service providers to cash checks and send out money orders. The associated fees cost these families hundreds of dollars each year.
Along with the higher cost of living being a member of a bank or credit union can have negative long-term consequences. Unbanked households, which the FDIC defines as those that don't have a bank account at an institution that is insured, aren't able to use savings accounts to build emergency funds. They also can't switch to tools that save time for transactions such as paying bills and transferring money.
"The conventional banking system is beyond the reach of millions of Americans," says Sean McQuay NerdWallet's banking experts and expert on credit. "While it may seem like a daunting task but having an bank account can be the first step towards breaking your cycle of going from paycheck to paycheck, paving the way for financial freedom."
The majority of households that don't have the luxury of a bank account say the main reason is that they don't have enough money. The median post-tax income for these households is $18,203, according NerdWallet's analysis based on data from the Federal Deposit Insurance Corp. The high costs associated with alternatives to traditional financial services only makes the situation even more expensive.
However, there are cheaper options available and taking advantage of these can help reduce unnecessary costs.
The most important findings
The annual average cost of not having a bank account is $196.50 for customers who utilize an prepaid debit card that includes direct deposit. That figure jumps to $497.33 when the card doesn't allow direct deposit.
People who deal only in cash face average annual expenses of $198.83 for check cashing as well as money-order services.
With an estimated 9 million unbanked households living in the United States, down from 9.5 million in 2013, the overall annual cost to these families is between $1.8 billion and $4.5 billion.
Not having a bank account forces people to use alternative financial services; people who are not banked are 6 times as likely utilize costly .
Transacting 'off the grid' is costly
"In many respects it is possible to compare the requirements of households that aren't banked with those of banked households," says John Thompson, senior vice president at the Center for Financial Services Innovation an independent consultancy firm for financial services. Certain transactions need to happen in order to be completed, but for those who don't have bank accounts these transactions don't occur through a bank, Thompson says. That's why they can be costly.
Consider cashing a check as an example. If you do it through a bank or credit union, the procedure is as simple as it is affordable. However, this convenience disappears when you aren't a member of the traditional financial institution and the alternative is a bit pricey.
Check-cashing companies typically charge between 1% to 10% of a check's value, and that means unbanked consumers who don't use 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 data , and taking the fee is one percent of the check's value. Customers who don't have banking accounts are around 6-fold more likely to utilize check-cashing services than those who do.
"Relying on services like cashing checks and money orders is costly and it's the Americans who can't afford these fees and inconveniences who are left without a bank account," McQuay says.
Instead of checking accounts, some people utilize prepaid debit cards. These are available at grocery stores as well as other retailers such as Target, Walgreens and Wal-Mart. This type of card is fairly uncomplicated: Users are able to spend only the amount they have loaded into the card.
Costs of checking accounts
, which have lower overdraft fees and free monthly fees, will charge customers about $30 annually. The average checking account cost customers about $150 per year with monthly maintenance charges as well as two overdraft fees.
" Relying on services like check cashing and money orders can be costly and it's the Americans who are the least able to pay the costs and inconveniences of these services that have to be without banking. " Sean McQuay , NerdWallet expert on banking and credit
However, prepaid cards tend to be more costly than traditional checking accounts, which cost users the equivalent of $179.70 or $298.50 per year, depending on whether the card is equipped with an automatic direct deposit service. If it does not, cardholders are charged hefty fees for loading cash. In addition, prepaid cards generally include monthly fees or per-transaction costs and ATM fees for withdrawals.
Someone who doesn't have a checking account nor the prepaid card is subject to average annual fees of $198.83 for cashing checks and money order services.
In addition to their cost In addition, prepaid cards have other shortcomings. People can't use them to build credit, and federal law doesn't require prepaid cards to provide protection against fraud, like they do for standard debit cards. That said, networks like American Express, Discover, MasterCard and Visa generally offer a certain number of purchase protections, although this won't cover ATM and certain online transactions.
Furthermore, the majority of checking accounts are backed by the government. This means that account holders won't lose any money, up to $250,000, in the event that the bank were to go under. Customers who have debit cards that are prepaid get this kind of protection when their card is issued by a bank however, even if they do they might not receive the entire amount back. If they purchased their credit card from an issuer that's not covered by the FDIC, which is fairly rare, the rules of the issuer determine the level of protection offered and whether the card will be paid back.
Indirect costs take their toll also.
The downsides of not having an bank account go beyond the high costs of alternative financial services. One of the biggest disadvantages is that not being a member to a bank can take up time. Unbanked consumers who don't use prepay cards aren't able to access to the various conveniences that come with mobile and online banking for example, automatic bill payments and no-cost money-transfer services. Prepaid cards can offer these features, but they usually aren't free, unlike those offered by banks and credit unions.
"If you're not a member of an institution that offers financial services it isn't possible to bank on your time," Thompson says, saying that this can force people to miss work, hurting their pay. If people have to travel to take care of money-related chores and travel, they will incur costs for transportation, too, he notes.
Not being able to use traditional banking products can be detrimental in different ways, as well. Banks provide access to tools to aid them in maintaining or improving their financial health, like deposits, certificates of deposit, and secured credit cards. These , for example, can, help them create an emergency fund as well as develop credit, which will decreases the need for costly payday loans.
The median sum borrowed by payday lenders is just $350 According to a study , a sum that people who are members of a financial institution or credit union could accumulate by using a savings account, or use a secured credit card to cover. That would allow people to stay clear of predatory loans that have the median interest rate of around .
With secured and savings cards, it is easier to maintain healthy credit. In addition, the costs of borrowing are smaller; the most sought-after secured credit cards usually have interest rates at around 20%.
"We have systems that let us create information about past credit history," says Gregory B. Fairchild who is associate professor of business administration in the University of Virginia Darden School of Business. "Absent these information, the real cost that people face in the long run is they're a risk."
"Everyone's at risk," he says, however, the risk for those without credit histories "is extremely uncertain."
And that risk can have an effect that trickles down to different areas of people's lives, harming their ability to borrow money credit cards, take out loans and even to start an enterprise.
Without a credit history, entrepreneurs with small businesses have a harder time getting lines of credit, says Tara Robinson, chief development officer at Mission Asset Fund, a non-profit that offers loans as well as other products for underserved families. The absence of a credit history can therefore restrict the potential of earning according to her.
"You kind of get stuck before you even begin," Robinson says.
Better options for consumers who aren't banked
If you don't have a bank account, it may seem like expensive alternatives financial services are the only choices. However, that's not the situation. Here are some strategies that are worth considering.
Make use of second-chance checks: If you have had an unpaid check or closed an account before paying a bank charge, you may be listed in , a consumer reporting agency. A negative report is usually all it takes to get a bank to turn down your request for opening a new account.
But some financial institutions offer second-chance checking accounts. They eliminate the requirement to utilize check-cashing services or money orders, the latter of which costs unbanked customers approximately $17 annually. They are accessible to anyone who is listed in 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 build and better manage your emergency fund. To open either account, you'll have to present proof of identity and be required to deposit an initial amount that ranges from $10 to $100.
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Get a secured credit card: With secured cards you pay an amount of money, usually at least $300 or $200 that you then use to borrow. Once you've used your secured card in a responsible manner for about a year, you might be given an opportunity to upgrade to a regular credit card.
In addition it will improve your credit score during the process, which makes you more appealing to lenders. That's, of course, that you pay your monthly bills on time and in full.
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Join a lending circle or collaborate with a small-scale community lender The process of borrowing money and repaying it in time can improve your credit score, and using traditional loans from credit unions and banks aren't the only choice. Mission Asset Fund, Robinson's employer, manages and facilitates lending circles, which offer the unique zero-interest loan.
"Each loan is typically around 1,000 dollars," Robinson says. "You are a group of 10 people who come together, and they contribute $100 each month, with one receiving the loan each month. The process continues until everyone receives an loan."
Like most organizations that oversee lending circles, Mission Asset reports repayment behaviors to credit bureaus monthly. For those with poor credit, who pay on time can improve their scores by averaging 700 after just one year, Robinson says.
"It's the perfect opportunity to allow folks who don't have credit scores to establish credit quickly , and for those with damaged credit scores to assist them in starting building them up with an unsecured line of credit," she adds.
Look for any local community lender or nonprofit in your area that can facilitate these types of loans or similar financial services.
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Incorporating the mainstream financial system
From depositing checks to using savings accounts, the reasons that people use banks might not sound appealing. In the end, however banks play an important role as elements in families' financial lives. If you're not able to access to a bank, managing your money and taking care of daily financial chores can be harder and most likely to be more costly.
That's what makes second-chance checking accounts, secured credit cards, lending circles and community lenders extremely valuable. They give families access to traditional financial services that they might otherwise be missing out on, thus opening the way to better financial security.
NerdWallet Data analyst Sreekar Jasthi and writer Spencer Tierney participated in this study.
METHODOLOGY
To determine the median income for households with no bank accounts using information taken from 2015's FDIC Nationwide Survey of Underbanked and Unbanked Households. The survey revealed that 7% of households were not banked. To calculate the cost of cashing checks for those who are unbanked and who use prepaid debit cards that do not require direct deposit, and for households with cash only We assumed two paychecks cashed per month and a 1% fee on the check's value. We also assumed one money order each 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. For the typical check account we assumed two overdrafts per year at a cost of $30 each as well as the maintenance fee in the amount of $7.50 per month. To calculate average check cashing and money order fees, we used the FDIC's data on what frequency alternative financing services utilized by the type of household (banked or not banked) and then used the lower frequency of usage among households with bank accounts to the costs averaged.
For the calculation of the annual average cost of prepaid debit cards, we examined the 69 cards we examined, based on major issuers, high-traffic searches, Pew Charitable Trust's and the offerings of cards on and 's websites. For cards with different plans we included each plan as a separate card.
The study includes the annual costs of the prepaid debit card that comes with and without direct deposit for payroll. The median monthly fee used was $4.98 The median out-of-network ATM cost was $2.50. We utilized the maximum cash load fee of $4.95.
For the direct deposit option, we assumed 12 monthly fee as well as two non-network ATM fees per month. In the case of the non-direct deposit option we assumed 12 monthly fees as well as four ATM fees per month, plus two cash-load fees per month. Signature-based and PIN-based transaction fees are typically not applicable to cards that have monthly fees, so they were excluded.
Author bio Tony Armstrong is a banking editor at NerdWallet. He has had his work covered by Mashable, the Los Angeles Times, Mashable and USA Today.
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