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The Price of Not Being Banked: Hundreds of Dollars a Year, Always One Step behind.

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The Price of Not Being Banked: 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 covered personal finances for over 10 years. Tony began his NerdWallet career as a journalist and moved up to the position of assistant assigning editor, and later to lead editor. Writing by him has also been featured by the Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony lives in Minneapolis, Minnesota.

Sep 13, 2016

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Banks can cause their fair share of problems, but not having access to one is even more detrimental to your financial health. In the absence of an institution that provides basic services such as free cashing checks and loans that have reasonable interest rates, unbanked consumers depend on costly alternative financial service providers to cash their checks and cash payments on money-orders. The associated fees cost these families hundreds of dollars each year.

In addition to the significant cost of living Not belonging to a bank or credit union can have negative long-term consequences. The unbanked household, which the FDIC defines as those that do not have an account at an insured institution, cannot save money to create emergency funds. They are also unable to turn to time-saving tools to perform things like paying bills and transferring money.

«The conventional banking system 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 appear impossible, using a bank account could be the first step towards stopping this cycle that sees us living from paycheck to paycheck, thereby paving the way for financially secure.»

A majority of households who do not have a bank account are told the reason is they do not have enough money. The average post-tax income for these households is $18,203 according to NerdWallet’s analysis based on data from the Federal Deposit Insurance Corp. The high cost of alternative financial services only make matters even more expensive.

But cheaper services are available, and taking advantage of them can allow people to cut down on unnecessary costs.

Key conclusions

The annual average cost of not having an account at a bank is $196.50 for people who use the prepaid debit card which has direct deposit. This figure increases to $497.33 in the event that the card does not allow direct deposit.

Customers who only deal with cash have annual costs of $198.83 for cashing checks as well as the money-order services.

With approximately 9 million households that are not banked across the United States, down from 9.5 million in 2013, the total annual cost to families in these households is between $1.8 billion to $4.5 billion.

Not having an account at a bank force people to look for other financial services; unbanked consumers are 6 times as likely make use of expensive .

Transacting «off grid» can be costly

«In many ways you can compare the needs of nonbanked households with those of banked households,» says John Thompson the senior vice president of the Center for Financial Services Innovation which is a non-profit consultancy firm for financial services. Certain transactions must take place however for consumers who aren’t banked these transactions don’t occur through a bank, Thompson says. And that’s where they get costly.

Cashing checks, for instance. When it’s done through a bank or credit union, the process is as simple as it is cheap. However, this convenience disappears if you don’t belong to a traditional financial institution, and the alternative could be a hefty price.

Check-cashing companies 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 will pay on average $182.03 annually just to access their funds according to NerdWallet’s analysis of FDIC data and assuming the fee is one percent of the value of the check. The people who don’t have bank accounts are 6-fold more likely utilize check-cashing services than those who do.

«Relying on services like check cashing and money orders is expensive, and it’s those Americans who are unable to afford these fees and inconveniences that find themselves unbanked,» McQuay says.

In lieu for checking account, some people make use of debit cards that are prepaid. 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 of money they have loaded into the card.

Costs for checking account

The accounts, which are able to pay low overdraft charges and no monthly charges, charge customers about $30 annually. The average checking account cost customers approximately $150 per year, when factoring in monthly maintenance costs and two overdraft charges.

» relying on services such as money orders and check cashing can be costly and it’s Americans who are unable to afford these costs and hassles who are left without a bank account. » Sean McQuay , NerdWallet expert on banking and credit

However the prepaid cards tend to be more costly than regular checking accounts, costing users the equivalent of $179.70 or $298.50 annually, based on the card’s an automatic direct deposit service. If it does not, cardholders are charged hefty fees for loading cash. Additionally, prepaid cards usually come with monthly or per-transaction costs, along with ATM withdrawal fees.

Anyone who does not have a checking account nor an prepaid card will be charged annual charges of $198.83 for cashing checks or money transfer services.

Along with their expenses Prepaid cards also have other shortcomings. It isn’t possible to use them to establish credit, and the law in the US does not require that prepaid cards offer fraud protection, as they do for regular debit cards. But, the networks such as American Express, Discover, MasterCard and Visa generally offer a certain number of purchase protections however, this doesn’t include ATM as well as some online transactions.

Additionally, the majority of checking accounts are guaranteed by the government, which means that account holders won’t lose any money, up to $250,000, if the bank went under. People who use prepaid debit cards are protected when they’re issued by a bank however, even then it’s possible that they won’t get all of their money back. If they got their plastic from a company that isn’t covered by the FDIC which is quite common, the rules of the issuer determine the level of protection offered and whether the card will be paid back.

Indirect costs impose their burden also.

The dangers that come with not owning a banking account go beyond the high costs of other financial services. For one, not belonging to a bank takes extra time. Unbanked consumers who don’t use prepay cards aren’t able to access to the numerous advantages of mobile and online banking, like automatic bill payment and free money-transfer services. Prepaid cards may come with these options but they’re not available for free, as are those provided by banks and credit unions.

«If you don’t belong to any financial institution it isn’t possible to bank on what you do,» Thompson says, adding that this may make people miss work, hurting their earnings. If someone has to travel to take care of money-related chores and travel, they will incur costs for transportation as well, Thompson says.

Inability to access the standard banking services can hurt individuals in different ways, as well. Banks provide access to tools that help them maintain or improve their overall financial condition, like deposits, certificates of deposit and secure credit cards. These can, for example aid in the creation of an emergency fund and develop credit, which will decreases the requirement for costly payday loans.

The median amount borrowed from payday lenders 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 can build with a savings account or secure credit card to cover. That would allow people to stay clear of excessive loans, which have average interest rates of about .

With the help of savings accounts and secured cards, it’s more easy to keep healthy credit. In addition, the expense of borrowing less; the most popular secured credit cards usually offer rates of interest at around 20%.

«We have systems that let us generate data about people’s past credit behavior,» says Gregory B. Fairchild, associate professor of administration for business of the University of Virginia Darden School of Business. «Absent these data, the very real risk for individuals will be that they’re constantly a risk.»

«Everyone’s a chance,» he says, but the risk for people with no credit history «is extremely uncertain.»

This risk could have an effect that trickles down to other areas of people’s lives and affect their ability to take out credit cards, obtain credit and even to start a business.

Without a credit history, small business owners have a harder time getting lines of credit as per Tara Robinson, chief development officer at Mission Asset Fund, a non-profit organization that provides loans as well as other products for unserved families. Not having a credit history is a factor that can hinder people’s earning potential according to her.

«You kind of get stuck before you start,» Robinson says.

Better options for those who do not have bank accounts

If you don’t have an account at a bank account, it may seem as if costly alternative financial services are your only options. But that’s not necessarily the situation. Here are a few strategies that are worth considering.

Make use of second-chance checks when you’ve experienced bounced checks or closed an account before paying a bank charge, you may be listed in the Consumer Reporting Agency. A negative file is often all it takes to get a bank to turn down your application for an account upgrade.

But some financial institutions provide second chance checking accounts. These accounts eliminate the need 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 on ChexSystems and can be used to re-establish a clean banking history. If you’ve accomplished this, think about 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 make an initial deposit between $10 and $100.

>> MORE:

Secure your credit card: With secured cards, you put down an initial deposit, typically at least $300 or $200 and then use to borrow. Once you’ve used your secured card for a period of about one year, you could be given an upgrade to a regular credit card.

Perhaps more importantly is that you’ll have improved your credit score in the process, making you more appealing to lenders. This assumes, of course, that you make your monthly installments punctually and on time.

>> MORE:

Join a lending circle , or join a small, community lender The process of borrowing money and then repaying on time can improve your credit score, and using traditional loans from banks or credit unions isn’t the only option. Mission Asset Fund, Robinson’s employer, oversees and manages lending circles, which offer a special type of zero-interest loan.

«Each loan is typically around 1,000 dollars,» Robinson says. «You have 10 people working together and contribute $100 each month, with only one receiving the loan each month. It rotates around until everyone gets an loan.»

Like most organizations that oversee lending circles, Mission Asset reports repayment behavior to credit bureaus monthly. Anyone with no credit history who make their payments punctually can raise their scores to about 650 after only six months, Robinson says.

«It’s an excellent opportunity for those with no credit scores to build credit quickly , and for those who have damaged scores to help start to rebuild them with the benefit of a credit line,» she adds.

Check to see if there’s a local community lender or non-profit organization in your city that facilitates the types of loans or similar financial services.

>> MORE:

The financial mainstream is about to enter

From depositing checks to using savings accounts, the reasons why people use banks might not be exciting. However, in the end banks play an important role as foundations for families their financial lives. If you’re not connected to a bank, managing your money and handling your daily financial chores can be harder and probably more costly.

That’s what makes second-chance checking accounts and secured credit cards lending circles , and community lenders so valuable. They give families access to traditional financial services that they would otherwise miss out on, and thus pave the way for an improved financial security.

NerdWallet Data analyst Sreekar Jasthi and writer Spencer Tierney participated in this study.

METHODOLOGY

To determine the median income of unbanked households we used information from the 2015 FDIC Nationwide Survey of Underbanked and Unbanked Households. The survey revealed that 7 percent of households had no bank accounts. To calculate the cost of cashing checks for unbanked households that use prepaid debit cards with no direct deposit, and for households with cash only we assumed two checks cashed per month as well as a 1% cost of the check’s total value. We also considered one money order being sent per 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 checking account, we assumed two overdrafts per year at a cost of $30 each as well as maintenance fees in the amount of $7.50 monthly. To calculate average check cashing and money order charges using the FDIC’s statistics on the frequency of alternative financial services use by households of different types (banked or not banked) Then, we used the lower frequency of usage among households with bank accounts to the cost average.

For the calculation of the annual average cost of prepaid debit cards we looked at the 69 cards we examined, based on the top issuers, the highest search volumes, Pew Charitable Trust’s and the cards listed on the websites of and. For cards with different plans We counted each plan as an individual card.

The analysis includes the annual costs of the prepaid debit card that comes with and without direct deposit for payroll. The median monthly fee was $4.98 and the median out-of-network ATM fee used was $2.50. We used the maximum charge for cash loads of $4.95.

In the case of direct deposit we assumed that there would be 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, four ATM charges per month, plus two cash-load charges each month. Signature-based and PIN-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. His work has been highlighted on Mashable, the Los Angeles Times, Mashable and USA Today.

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