Drift without a bank? this is what it costs you


Banks can cause their fair share of headaches, but not having access is even worse for your financial health. Not being able to turn to a financial institution that offers basic services like free check cashing and loans at reasonable interest rates means unbanked consumers are dependent on expensive alternative financial service providers. The companion fees cost these households hundreds of dollars a year.

People who don’t have a checking account often turn to prepaid debit cards as an alternative. Using data from the Federal Deposit Insurance Corp., NerdWallet found that the average annual cost of not having a bank account is $ 196.50 for people who use a prepaid card that offers direct deposit. That figure jumps to $ 488.89 if the card doesn’t offer direct deposit. These costs include the ongoing charges associated with prepaid cards and money orders – and, for people whose cards don’t offer direct deposit, check cashing services.

With more than 9.5 million unbanked households in the United States, the total annual cost to these families is between $ 1.9 billion and $ 4.7 billion. A recent snapshot of the 2015 FDIC National Survey of Unbanked and Underbanked Households, due to be released in full on October 20, 2016, found that the unbanked rate fell to 7%, or about 8%. , 6 million households. NerdWallet’s analysis is based on the most recent full set of data available.

People who do not have a bank account cannot use savings accounts to build up emergency funds and cannot turn to time-saving tools for transactions such as paying bills and money transfer.

“Poverty in the United States is a vicious cycle with many contributing factors,” says Devan Goldstein, banking expert at NerdWallet. “Basic money management may seem easy to those who grew up off the cycle, but the lack of low-cost, low-friction access to the right products and services can make it much harder to stay on the right one. way financially. “

But cheaper services are available, and taking advantage of them can help people cut unnecessary expenses.

Off-grid transactions are expensive

Some financial transactions have yet to take place, but for unbanked consumers, they are not done through a bank, says John Thompson, senior vice president of the Center for Financial Services Innovation, a service consulting firm. financial non-profit. And this is where things get expensive.

Take cashing a check. Check cashing companies typically charge between 1% and 10% of the value of a check. This means that people who don’t have a bank account and don’t use a prepaid debit card with direct deposit pay an average of $ 173.59 per year just to access their money, assuming a 1% fee. . People who do not have a bank account are about nine times more likely to use check cashing services than people who do.

With prepaid debit cards, users can only spend the amount of money they have loaded on the card. While this feature can serve as a useful budgeting tool, there’s a catch: Prepaid cards tend to be more expensive than standard checking accounts.

Not including the fees for cashing checks and money orders, a direct deposit card will cost an average person $ 179.70 per year, while a non-direct deposit card will cost an average of $ 298.50. The average checking account costs customers around $ 150 per year, including monthly maintenance fees and two overdraft fees. NerdWallet recommended accounts, which have lower overdraft fees and no monthly fees, cost customers around $ 30 per year.

People cannot use prepaid debit cards to accumulate credit, and issuers are not required by law to offer fraud protection, unlike standard debit card issuers. That said, networks like American Express AXP,
+ 5.45%
Discover, MasterCard and Visa V,
generally provide some purchase protection, although this does not cover ATMs and some online transactions.

Indirect costs also take their toll

Not belonging to a bank also takes extra time. Unbanked consumers who do not use prepaid cards do not have access to the many amenities offered by online and mobile banking.

“If you don’t belong to a financial institution, you can’t count on your time,” says Thompson, adding that this can force people to take time off work, thus hurting their wages.

Banks also give people access to tools that can help them maintain or improve their financial health, such as savings accounts, certificates of deposit, and secure credit cards. These can, for example, help them create a emergency fund and maintain healthy credit, which reduces the need for expensive payday loans.

The median amount borrowed from payday lenders is only $ 350, according to one 2013 Consumer Financial Protection Bureau Report, an amount that people in a bank or credit union could build up with a savings account or use a secured credit card to cover. This would allow them to avoid predatory loans, which have median interest rates of around 300%. The most popular secured credit cards, on the other hand, typically have rates around 20%.

Better options for unbanked consumers

If you don’t have a bank account, it may seem like expensive alternative financial services are your only options. But this is not necessarily the case. Here are some strategies worth pursuing.

Take advantage of second chance control. If you’ve had a bad check or closed an account before paying bank charges, you may be listed in ChexSystems, a consumer information agency. A negative file is often enough for a bank to refuse your request to open an account.

Some financial institutions offer second chance checking accounts, which are available to those listed in ChexSystems. Once you’ve restored your banking history, consider opening a savings account to help build and better manage your emergency fund.

Get a secured credit card. You will be asked to deposit a deposit, usually at least $ 200 or $ 300, which you can then borrow from. After you’ve made your monthly payments on time and in full for about a year, you may be offered an upgrade to a standard credit card. Most importantly, you will have improved your credit score during the process.

Join a circle of lenders or work with a small community lender. Borrowing money and paying it back on time improves your credit, but taking traditional loans from banks and credit unions isn’t your only option. Mission Asset Fund facilitates and oversees Lending Circles, which offer a special type of zero-interest loan.

“Each loan is typically around $ 1,000,” says Tara Robinson, director of development for the organization. “You have 10 people getting together and they each put in $ 100 each month, with one person getting the loan each month. It spins until everyone gets the loan.

Like most organizations that oversee credit circles, Mission Asset Fund reports repayment behavior to credit bureaus on a monthly basis. People with non-existent credit who make their payments on time can improve their scores to around 650 after just six months, Robinson says.

Reaching the general financial public

From depositing checks to using savings accounts, the reasons people turn to banks may not seem particularly exciting. Ultimately, however, banks are important pillars in the financial life of families. If you don’t have access to it, managing your money and day-to-day financial tasks can be more difficult and will almost certainly cost more.

This is what makes second chance checking accounts, secured credit cards, lending circles and community lenders so valuable. They provide families with access to traditional financial services that they would otherwise be missing, paving the way for a more secure financial future.

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