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The Cost of Being Unbanked: Hundreds of Dollars a Year, always one step Behind
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The cost of not having a bank account: Hundreds of Dollars a Year, always one step behind.
Written by Tony Armstrong Lead Assigning Editor | Banking Tony Armstrong leads the banking team at NerdWallet. He has covered personal finances for over 10 years. Tony started his career at NerdWallet as a writer and moved up to the position of assistant assigning editor, and then to lead assigning editor. His writing has been featured by The Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.
Sep 13, 2016
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Banks may bring about a fair amount of problems However, not having access to one is even more detrimental to your financial wellbeing. Without access to an institution that provides basic services like free check cashing , and loans that have reasonable interest rates, unbanked consumers rely on expensive alternative financial-service providers to cash checks and take away money order. The associated fees cost these families hundreds of dollars each year.
On top of the high cost of living being a member of an institution like a credit union or bank is a risk for the long term. Unbanked households, which the FDIC defines as households 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 time-saving tools for things like making payments or transfer money.
“The conventional banking system remains far from the reach of millions of Americans,” says Sean McQuay the NerdWallet’s banking expert experts and expert on credit. “While it might appear impossible to open a bank account, having one could represent the very first stage to ending your cycle of going from paycheck to paycheck, and thus pave the way for financial freedom.”
A majority of households who don’t have a savings or checking account with a bank say the main reason is that they don’t have enough money. The average income after tax of such households is just $18,203 according to NerdWallet’s analysis of the data from the Federal Deposit Insurance Corp. The high cost of alternative financial services only make the situation even more expensive.
There are also cheaper options and using these can help reduce unnecessary expenses.
The key findings
The annual average cost of not having an account at a bank is $196.50 for those who have a prepaid debit card that has direct deposit. That figure jumps to $497.33 when the card doesn’t allow direct deposit.
People who deal only with cash have annual expenses of $198.83 for cashing checks and cash order service.
With a total of 9 million households without bank accounts within the United States, down from 9.5 million in 2013, the total annual cost for the families of these households ranges from $1.8 billion and $4.5 billion.
Not having a bank account forces people to look for other financial services. People who do not have a bank account are 6 times as likely use costly .
Transacting “off grid” is expensive
“In many ways it is possible to compare the needs of unbanked households with those of banks,” says John Thompson the senior vice president of the Center for Financial Services Innovation which is a non-profit financial services consulting firm. Certain transactions must take place in order to be completed, but for those who don’t have bank accounts, they don’t happen through banks, Thompson says. This is where they become costly.
Consider cashing a check as an example. If you do it via a credit or bank union, the task is as simple as it is inexpensive. However, that convenience is lost in the event that you don’t belong to an established financial institution and alternatively, it can be hair-raisingly expensive.
Check-cashing firms generally cost between 1% and 10 percent of the value of a check, and that means unbanked consumers who don’t carry an prepaid card with direct deposit will pay an average of $182.03 annually just to access their funds according to NerdWallet’s analysis of FDIC information and using a fee of 1% of the value of the check. Customers who don’t have banking accounts are six times more likely to make use of check-cashing services than those who do.
“Relying on services like money orders and cash advances is expensive, and it’s those Americans who are unable to afford the costs and inconveniences of these services that are left without a bank account,” McQuay says.
In lieu for checking account, some people use debit cards that are prepaid. They are offered at supermarket shops and at other stores like Target, Walgreens and Wal-Mart. This type of card is fairly uncomplicated: Users can spend only the amount of money they have loaded onto the card.
Costs for checking account
, which have less overdraft fees and have no monthly charges, cost around $30 per year. The average checking account cost customers approximately $150 per year with monthly maintenance costs and two overdraft fees.
” relying on services such as check cashing and money orders can be costly and it’s Americans who are the least able to pay these fees and inconveniences that find themselves unbanked. ” Sean McQuay , NerdWallet expert in banking and credit
However the prepaid cards tend to be more costly than standard checking accounts. They cost users an average of either $179.70 or $298.50 per year, depending on the card’s an automatic direct deposit service. If not, customers are charged hefty fees for loading cash. Additionally, prepaid cards usually have either monthly fees or per transaction charges and ATM withdrawal fees.
A person who uses neither an account for checking nor a prepaid card faces average annual fees of $198.83 for cashing checks or money transfer services.
On top of their costs, prepaid cards have other issues. People can’t use them to build credit, and the law in the US does not require that prepaid cards offer protection against fraud, just as they do with standard debit cards. That said, networks like American Express, Discover, MasterCard and Visa generally provide a specific amount of protection for purchases, although this won’t cover ATM and certain online transactions.
Additionally, the majority of checking accounts are insured by the government, which means account holders wouldn’t lose money, up to $250,000, should the institution goes under. The people who use debit cards that are prepaid are protected when the card is issued by a bank however, even if they do it’s possible that they won’t get the entire amount back. If they bought their card from a company that isn’t insured by the FDIC which is quite rare, the rules of the issuer determine the level of protection and whether they’d be reimbursed.
Indirect costs take their toll, too
The negatives of not having a bank account extend beyond the cost of other financial services. For one, not belonging to a bank can take up time. Unbanked consumers who don’t use card that are prepaid don’t have access to the numerous advantages of mobile and online banking, like automatic bill payment and money transfer services that are free. Prepaid cards can offer these services, but they usually aren’t free, unlike those offered by credit unions and banks.
“If you’re not a member of an institution that offers financial services, you can’t bank on the time you spend,” Thompson says, saying that this can make people take time off work, which can affect their earnings. If someone has to travel for the sake of financial obligations and travel, they will incur costs for transportation also, he says.
Not being able to use the standard banking services can hurt people in different ways too. Banks provide access to tools that can help them maintain or improve the health of their finances, including certificates of deposit, secure credit cards. These can, for example, help them create an emergency fund and increase credit, which can decreases the need for costly payday loans.
The average sum borrowed by payday lending companies is just $350, as per a study by the National Association of Credit Unions. This is a figure that those who are members of a bank or credit union could build by using a savings account, or a secured credit card to pay for. This will allow people to stay clear of predatory loans, which have the median interest rate of around .
With savings accounts and secured cards, it becomes easy to maintain a healthy credit score. The costs of borrowing are much smaller; the most sought-after secured credit cards typically offer rates of interest at around 20%.
“We have technology that allows us to have some way of generating information on people’s credit history,” says Gregory B. Fairchild, associate professor of business administration at the University of Virginia Darden School of Business. “Absent this facts, the most significant cost for people in the long run is they’re at risk.”
“Everyone’s at risk,” he says, but the risk for people who have no credit history “is extremely uncertain.”
This risk could have a trickle-down effect into other areas of people’s lives and affect their ability to get loans credit cards, obtain credit and even start an enterprise.
Without a credit history, small-scale business owners face difficulty getting credit lines as per Tara Robinson, chief development officer at Mission Asset Fund, a nonprofit that facilitates loans and other financial products to previously underserved families. Not having a credit history is a factor that can restrict the potential of earning, she says.
“You kind of get stuck before you even begin,” Robinson says.
Better options for unbanked consumers
For those who don’t own a banking account, it might seem like expensive financial services are the only alternatives. However, that’s not the case. Here are a few ideas that are worth considering.
Utilize second-chance checking: If you have had an unpaid check or closed an account before paying a bank fee, you could be listed on the Consumer Reporting Agency. A negative record is typically all it takes for a bank to turn down your application for a new account.
But some financial institutions have second-chance accounts for checking. These accounts eliminate the need to utilize check-cashing services or money orders, both of which costs unbanked customers approximately $17 annually. They are accessible to those who are listed on ChexSystems and are able to be used to establish a clean banking history. If you’ve accomplished that, consider opening an account for savings to help you build and manage your emergency fund. To open either account, you’ll need present proof of identity, and may be asked to deposit an initial amount between $10 and $100.
Get a secured credit card: When you purchase a secured card you pay an initial deposit, typically at least $300 or $200 and then borrow against. Once you’ve used your secured card for a period of about 1 year, you may be given an upgrade to a regular credit card.
Most importantly, you will have improved your credit score in the process, making you more appealing to lenders. That’s assuming that you make your monthly payments punctually and in full.
Join an lending circle or work with a small community lender: Borrowing money and repaying it on time improves your credit score, and borrowing 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 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 contribute $100 each month, with only one receiving the loan each month. The loan is distributed until everyone is able to get the loan.”
As with most companies that manage the lending circle, Mission Asset reports repayment behaviour to credit bureaus on a monthly basis. Anyone with no credit history who pay their bills punctually can raise their scores by 650 points within 6 months Robinson says.
“It’s an excellent opportunity for those with no credit scores to get credit quickly and for those who have damaged scores to help start building them up with the benefit of a credit line,” she adds.
Check to see if there’s an area-based community lender or nonprofit within your town that offers these kinds of loans or similar financial services.
The financial mainstream is about to enter
From depositing checks to using saving accounts to deposit checks, reasons people turn to banks may not be exciting. Ultimately, though, banks serve as important foundations for families’ financial lives. If you’re not connected to a bank to manage your money, handling your daily financial obligations can be difficult and probably more expensive.
This is what makes second-chance check accounts and secured credit cards lending circles , and community lenders extremely valuable. They give families access to traditional financial services they would otherwise miss out on, thus opening the way for better financial security.
NerdWallet analysts of data Sreekar Jasthi and writer Spencer Tierney were the authors of this study.
To determine the median income of unbanked households we used data from the 2015 FDIC national survey of Unbanked and Underbanked Households. It was revealed that 7 percent of households were unbanked. To calculate the cost of cashing checks for unbanked households who use prepaid debit cards that do not require direct deposit and unbanked households using only cash We assumed two paychecks cashed per month and a 1% charge of the total amount of the check. We also took the assumption that one money order is sent per month with an average charge 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 checking account we assumed two overdrafts every year for a total cost of $30 each as well as maintenance fees of $7.50 each month. To determine average check cashing and money order fee We used the FDIC’s statistics regarding how often alternative financing services use by kind of household (banked or non-banked), then used the lower frequency of the use of banks by households to the costs averaged.
For the calculation of the annual average cost of prepaid debit cards, we examined 69 cards, which were based on the top issuers, the highest search volume Pew Charitable Trust’s website, and the offerings of cards on and ‘s websites. For cards that offer several plans We included each plan as a distinct card.
The analysis includes the annual costs of a prepaid debit card with or without direct debit to pay payroll. The median monthly cost used was $4.98, and the median out-of-network ATM fee was $2.50. We used the maximum cost for cash loading of $4.95.
For the direct deposit option, we assumed that there would be 12 monthly fees and two out-of-network ATM fees per month. For the alternative that doesn’t require direct deposit, we assumed 12 monthly fees, 4 ATM fee per month, as well as two cash load charges each month. Signature- and PIN-based transaction fees typically don’t apply to cards with monthly fees, so they were not included.
The author’s bio: Tony Armstrong is a banking editor at NerdWallet. The work of Tony Armstrong has been highlighted in the Los Angeles Times, Mashable and USA Today.
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