Most of us don’t think twice about using direct deposit for our paychecks or swinging by the ATM to grab cash when we’re running low. But for the nearly 16 million US households that are currently “unbanked,” those things are impossible.
If you’re not familiar with the phrase, a person or household is considered “unbanked” when they are not served by a bank or other financial institution in any capacity. Additionally, 16 percent of Americans are considered “underbanked.” This means they have a traditional bank account, but also use alternative financial services, such as payday loans or car title loans. Let’s take a look at how it happens, the downsides of being unbanked or underbanked, and some potential solutions.
How it Happens
Some people choose to be unbanked because they don’t trust traditional financial institutions. Others opt for it because they think being unbanked will help keep creditors or collection agencies at bay (it won’t). However, the majority of those who are unbanked find themselves in that situation as a result of past financial mistakes. At a certain point, banks see these customers as a bad risk, and opt not to do business with them.
It Doesn’t Stop Collection Efforts
Some consumers mistakenly believe that being unbanked makes it impossible for creditors and collection agencies to pursue repayment. In reality, that’s not the case at all. In fact, what is likely to happen is creditors being even more aggressive, and using wage garnishment to collect unpaid debts. If you are intentionally unbanked due to credit issues, we have a better option. Credit Counseling and possibly, a Debt Management Plan, can help you address your debt and find a realistic repayment solution.
It Makes Life More Complicated
Being unbanked means things like cashing checks and paying bills are costly and time-consuming. Those who are unbanked often must rely on check cashing services to cash paychecks because they don’t have direct deposit. They also have to pay bills using money orders, which adds time and expense to the process. And not having a debit card or checks means having to carry cash for everyday expenses such as gas and groceries. If you lose cash or someone steals it, there’s no way to get it back. Pre-paid debit cards are an option, but they may carry high usage fees and can be hard to manage.
Explore Options to Get Back on Track
Once unbanked, it can be challenging to get back into the financial mainstream, but it’s worth the effort. Some options for doing so include:
- Second Chance Checking Accounts—Some banks and credit unions offer these accounts as a way to return to traditional banking. They often lack the perks and features of other checking accounts, but if a consumer manages a second chance account responsibly, they may have the opportunity to upgrade to a traditional account within a year.
- Working With a Credit Union or Local Bank —Credit unions and local banks are often willing to work one-on-one with customers. In addition to second chance checking accounts, these institutions may offer small personal loans. These can help consumers re-establish financial responsibility.
FAQs
Being unbanked or underbanked can seriously impact your financial health. A lack of access to modern-day banking services can also be incredibly inconvenient, time-consuming, and expensive. Becoming fully banked can help save you time, frustration, and a potentially-significant amount of money on fees in the long term.
What are the major downsides of being unbanked? ›
Risks of being unbanked
- You'll pay fees for alternative services such as check cashing and prepaid debit cards.
- Not having a bank-issued debit card can mean you'll need to carry cash, which might not be recovered if lost or stolen.
Unbanked people also typically do not have insurance, pensions, or any other type of professional money-related services. They may take advantage of alternative financial services, such as check cashing and payday lending, if such services are available to them.
What are some of the major downsides of being unbanked Quizlet? ›
Name 3 downsides of being unbanked.
- Can't make cashless purchase.
- Lack of access to credit.
- Loss of time doing bills.
Being unbanked means things like cashing checks and paying bills are costly and time-consuming. Those who are unbanked often must rely on check cashing services to cash paychecks because they don't have direct deposit. They also have to pay bills using money orders, which adds time and expense to the process.
What are the downsides of being unbanked and underbanked? ›
Being unbanked or underbanked can seriously impact your financial health. A lack of access to modern-day banking services can also be incredibly inconvenient, time-consuming, and expensive. Becoming fully banked can help save you time, frustration, and a potentially-significant amount of money on fees in the long term.
What are the costs of being unbanked? ›
Using the FDIC's estimate that some 63 million Americans are unbanked or underbanked, that would be an average of $3,000 in annual costs per person. As high as these costs are, they are only the direct costs that unbanked, and underbanked households face.
What are examples of unbanked? ›
People who do not use mainstream financial services, such as checking or savings accounts, and primarily conduct transactions in cash when using alternative financial services like payday lending or check cashing, are considered unbanked.
How do people live without a bank account? ›
Alternative Solutions to Paying Bills Without a Bank Account
If you'd rather avoid banks altogether, there are other options you can consider. Many people choose to simply carry cash with them. While this is easy to do for everyday items such as groceries or petrol, you do run the risk of theft.
What does it mean to be unbanked poor? ›
Unbanked is used to describe people who do not have a bank account. The term is informally used to describe adults who do not use banks or banking institutions in any manner. Unbanked persons make payment for goods and services in cash or else purchase money orders or prepaid debit cards.
Another potential disadvantage concerns security. Although abandoning cash helps to reduce theft and fraud, for many consumers, data and cybersecurity issues are a worry — with justification.
What are the characteristics of unbanked? ›
These characteristics comprise limited income, limited access to technology, limited access to banking infrastructure, limited means of receiving money, and a lack of documentation, as summarised in Table 2. ...
What are some of the dangers associated with banking? ›
These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks.
What are the reasons for being unbanked? ›
“Don't have enough money to meet minimum balance requirements” was cited by 21.7 percent of unbanked households as the main reason for not having an account—the most cited main reason.
What does it mean to be unbanked? ›
The FDIC defines an unbanked person as someone who does not hold either a checking or savings account with a banking institution insured by the FDIC. Unbanked people transact primarily in cash and store all their assets only in physical, offline formats.
Do you really need a bank account? ›
Bottom line. If you don't have a bank account, you could be paying unnecessary fees to pay your bills or otherwise manage your finances. Not only that, you may be missing out on some of the convenience and consumer protections that banks offer.
What are the downsides of in person banking? ›
Cons of brick-and-mortar banks
They charge higher fees and often have high minimum balance requirements. Loans and other products may cost more.
What are the disadvantages of having a bank account? ›
CONS:
- Fees – many checking accounts come with additional costs such as maintenance fees, ATM withdrawal fees and transaction fees.
- Overdraft fees – overdraft fees, when the balance goes below zero, are determined by each individual bank, making them difficult to understand and often very expensive.
There are also a few potential downsides to savings accounts.
- Interest Rates Can Vary. ...
- May Have Minimum Balance Requirements. ...
- May Charge Fees. ...
- Interest Is Taxable.
