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The cost of not having a bank account is Hundreds of Dollars per 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 been covering personal finance for nearly 10 years. Tony started his career at NerdWallet as a journalist and worked his way up to assistant assigning editor and later to lead editor. The writing of Tony has been featured by The Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony lives in Minneapolis, Minnesota.

 

 

 

 

 

 

Updated September 13th 2016, 2016

 

 

 

 

 

 

 

 

Many or all of the products we feature come from our partners, who pay us. This influences which products we review and where and how the product is featured on a page. But, it doesn't affect our opinions. Our views are our own. Here's a list of and .

 

 

 

 

Banks can bring about a fair amount of problems However, the lack of access to a bank is even worse for your financial wellbeing. In the absence of an institution offering basic services, such as cashing checks and loans with reasonable rates of interest Consumers who are not banked have to rely on other financial-service providers to cash their checks and cash away money order. The accompanying fees cost these households hundreds of dollars per year.

 

In addition to the significant daily costs, not belonging to an institution like a credit union or bank can have negative long-term consequences. Unbanked households, as the FDIC define as the ones who do not have an account with an insured institution, cannot make use of savings accounts to accumulate emergency funds. They are also unable to turn to time-saving tools to perform things like paying bills and transferring money.

 

"The bank system that is traditional is out of reach for many millions of Americans," says Sean McQuay the NerdWallet's banking expert experts and expert on credit. "While it might seem impossible, using an bank account can be the first step in breaking your cycle of going from from paycheck to paycheck, and thus pave the way to financial independence."

 

More than of households that do not have an bank account say the main reason is they don't have enough funds. The average post-tax income for these households is $18,203, according to NerdWallet's analysis of data obtained from Federal Deposit Insurance Corp. The high cost of other financial services can only make things even more expensive.

 

There are also cheaper options and using these can help reduce unnecessary costs.

 

The key findings

 

The cost per year of not having a bank account is $196.50 for customers who utilize a prepaid debit card that has direct deposit. That figure jumps to $497.33 if the card doesn't offer direct deposit.

 

Customers who only deal in cash are subject to annual expenses of $198.83 for cashing checks 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 aggregate 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 an bank account forces people to use alternative financial services; people who are not banked are 6 times as 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 which is a non-profit consulting firm in the field of financial services. Certain transactions must take place however for consumers who aren't banked, they don't happen through the bank, Thompson says. This is where they become costly.

 

Take cashing a check, for example. When done by a bank or credit union, the task is as easy as it is affordable. However, that convenience is lost if you don't belong to an established financial institution and the alternative can be hair-raisingly expensive.

 

Check-cashing firms generally cost between 1% and 10 percent of the value of a check which means that unbanked consumers who don't use the prepaid cards that offer direct deposit, pay an average of $182.03 per year just to access their cash as per NerdWallet's analysis of FDIC data , and taking that a fee of one percent of the value of the check. The people who don't have bank accounts are 6 times more likely use check-cashing services than people who have.

 

"Relying on services like cashing checks and money orders is costly and it's the Americans who can't afford the cost and inconvenience that find themselves unbanked," McQuay says.

 

In lieu the checking accounts that are available, certain people utilize pre-paid debit cards. They are offered at supermarket stores as well as other retailers such as Target, Walgreens and Wal-Mart. This type of plastic is fairly uncomplicated: Users are able to spend only the amount they have loaded onto the card.

 

Checking account costs

 

The accounts, which are able to pay lower overdraft fees and no monthly fees, cost customers around $30 annually. A typical checking account costs customers around $150 annually, when factoring in monthly maintenance charges as well as two overdraft fees.

 

" Relying on services like money orders and check cashing is expensive, and it's the Americans who can least afford these costs and hassles who find themselves unbanked. " Sean McQuay , NerdWallet expert on banking and credit

 

 

However the prepaid cards tend to be more expensive than standard checking accounts. They cost an average of either $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 face steep cash-loading fees. Additionally, prepaid cards usually come with monthly or per transaction costs as well as ATM fees for withdrawals.

 

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.

 

In addition to their cost, prepaid cards come with other drawbacks. They aren't able to be used to build credit and federal law does not require that prepaid cards provide fraud protection like they do for regular debit cards. That said, networks like American Express, Discover, MasterCard and Visa typically offer a specific number of purchase protections but they don't offer protection for ATM and some online transactions.

 

What's more, most checking accounts are guaranteed by the federal government, which means that the account holders will not lose money, up to $250,000, should the institution went bankrupt. The people who use prepaid debit cards are protected in the event that they're made by a banking institution, however, even then they might not receive the entire amount back. If they got their plastic from a company that isn't covered by the FDIC and this is not uncommon, the issuer's rules determine the degree of protection offered and whether the card will be paid back.

 

Indirect costs are a major factor as well.

 

The dangers of not having an bank account go beyond the expensive costs of other financial services. For one, not belonging to a bank takes extra time. Consumers who aren't banked and don't have credit cards with a prepaid option don't have access to the many conveniences that come with mobile and online banking such as automatic bill pay and free money-transfer services. Prepaid cards might offer these options, but they usually aren't free, unlike those offered by credit unions and banks.

 

"If you're not a member of an institution of financial service, you can't bank on your time," Thompson says, saying that this can make people take time off work, which can affect their pay. If employees have to travel to take care of financial obligations, they incur transportation costs also, he says.

 

Inability to access traditional banking products can be detrimental in different ways, too. A bank gives people access to tools to assist them in maintaining or improving their financial health, like deposits, certificates of deposit, and secured credit cards. They can, for instance, help them create an emergency fund or build credit, which helps to reduce the requirement for expensive payday loans.

 

The median sum borrowed by payday lenders is just $350 as per a report the report. This is a figure that those who belong to a bank or credit union can build by using a savings account, or use a secured credit card to cover. That will allow the borrower to stay away from predatory loans that have the median interest rate of around .

 

With savings accounts and secured cards, it's easy to maintain a healthy credit score. The expense of borrowing lower; the most well-known secured credit cards generally offer rates of interest at around 20%.

 

"We have systems that allow us to generate information about past credit habits," says Gregory B. Fairchild who is associate professor of management in the University of Virginia Darden School of Business. "Absent those information, the real cost for people is that they're always a risk."

 

"Everyone's an individual danger," he says, however, the risk for those with no credit history "is highly uncertain."

 

The risk of a lapse in judgement can cause a trickle-down effect into other aspects of life and affect their ability to get loans credit cards, take out loans or even begin an business.

 

Without a credit history entrepreneurs with small businesses are less likely to get credit lines, according to Tara Robinson, chief development officer at Mission Asset Fund, a non-profit organization that provides loans and other financial products for previously unserved families. A lack of credit history could restrict the potential of earning as she explains.

 

"You are a bit stuck before you can even get started," Robinson says.

 

Better options for unbanked consumers

 

If you do not have a bank account, it may appear as if costly alternative financial services are the only options. But that's not necessarily the situation. Here are some ideas to consider.

 

Make use of second-chance checks If you've experienced an account closed or a check bounced, or you shut down an account prior to paying a bank charge, you could be listed on a consumer report agency. A negative record is typically the only thing that can cause a bank to turn down your request for opening a new account.

 

However, some banks provide second chance checking accounts. They eliminate the requirement to use check-cashing services and money orders, both of which cost unbanked consumers approximately $17 annually. These products are available to anyone who is listed in ChexSystems and can be used to establish a clean banking history. Once you've managed to do that, think about opening a savings account to help build and better manage your emergency funds. To open either account, you'll need to show proof of identification, and may be asked to deposit an initial sum of anywhere from $10 to $100.

 

>> MORE:

 

Get a secured credit card: When you purchase secured cards you pay a deposit, typically at least $300 or $200, which you can later borrow against. After using a secured card responsibly for about one year, you may be offered an upgrade to a credit card.

 

In addition, you will have improved your credit score during the process, thus becoming more appealing to lenders. This is assuming you, of course, you make your monthly payments on time and completely.

 

>> MORE:

 

Join an lending circle or join a small, community lender The process of borrowing money and paying it back on time improves your credit rating, and taking out traditional loans from banks and credit unions isn't the only option. Mission Asset Fund, Robinson's employer, facilitates and oversees lending circles, which provide a special type of zero-interest loan.

 

"Each loan is typically around $1,000," Robinson says. "You have 10 people come together, and they put in $100 every month, with one person receiving the loan each month. The process continues until everyone receives an loan."

 

Like most organizations that oversee the lending circle, Mission Asset reports repayment behaviors to credit bureaus monthly. For those with poor credit, who pay punctually can raise their scores to about 700 after just six months, Robinson says.

 

"It's the perfect opportunity to allow folks with no credit scores to get credit fast and for those with damaged scores , to assist in beginning to rebuild them with an unsecured line of credit," she adds.

 

Find out if there's an existing community lender or nonprofit within your town that offers these types of loans or similar financial services.

 

>> MORE:

 

Joining the financial mainstream

 

From depositing checks to using savings accounts, the reasons that people choose to bank may not sound particularly appealing. Ultimately, though banks are crucial pillars in families' financial lives. If you're not connected to one to manage your finances, managing your financial obligations can be difficult and almost certainly will be more expensive.

 

That's what makes second-chance checking accounts and secured credit cards community lenders and lending circles extremely valuable. They give families access to financial services traditional to which they could otherwise miss out on, paving the way for a more secure financial future.

 

NerdWallet analysts of data Sreekar Jasthi and writer Spencer Tierney were the authors of this study.

 

The METHODOLOGY

 

In order to calculate the average earnings for unbanked households We used information taken from 2015's FDIC Nationwide Survey of Unbanked and Underbanked Households. It was revealed that 7% of households had no bank accounts. To calculate the cost of cashing checks for unbanked households using prepaid debit cards without direct deposit, and for households with cash only, we assumed two paychecks cashed per month and a 1% charge of the check's total value. We also assumed that one money order is 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. For the average check account we assumed two overdrafts per calendar year for $30 each as well as the maintenance fee in the amount of $7.50 per month. To determine average check cashing and money order fee We used the FDIC's statistics regarding how often alternative financial services use by type of household (banked or non-banked) Then, we used the lower frequency of usage among households with bank accounts to the average costs.

 

For the calculation of the annual average cost of debit cards that are prepaid, we looked at 69 cards, which were based on major issuersand high search volumes Pew Charitable Trust's, as well as the offerings of cards on the websites of and. For cards with different plans, we counted each plan as an individual card.

 

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

 

In the case of direct deposit we assumed 12 monthly fees along with two outside-of-network ATM fees per month. In the case of the non-direct deposit option, we assumed 12 monthly fees, the four ATM fee per month and two cash load charges each month. PIN- and signature-based purchase transaction fees usually don't apply to cards that have monthly charges, which is why they weren't included.

 

 

 

 

The author's bio: 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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