Are you unbanked or underbanked? Bank accounts can save you money!

The terms “unbanked” and “underbanked” are being used quite a bit lately; mostly by financial institutions and local and federal government officials advocating safer financial practices for their communities.  But, how many of us know what these terms mean? And what’s so great about being “banked” anyway?

Let’s run through the definitions first.  The FDIC defines someone without a bank account, credit union account, or another financial institution account as “unbanked”. “Underbanked” typically means that, while someone may have a bank or credit union account, they also routinely subsidize that account with other non-traditional financial products like payday loans, check cashing, or pawn services.

Currently, there are about 60 million adults that are underbanked or unbanked entirely. So why is this a problem?

Well, if you are someone who is banked, you probably don’t worry about cashing your paycheck, social security check, or even just a personal check from a friend or family member.  You simply deposit the check into your account, right?  If you don’t have a bank account, however, you would probably resort to a check cashing store to redeem a check.  National studies have shown that the average check cashing fee is between 2-6%.  Imagine paying $20 – $60 for every $1000 payroll check! That’s money you have earned that you could be spending on food, gas, or clothing; and now you no longer have that option.  To make matters worse, some of these stores charge up to 20% of the value of the check they are cashing.

The unbanked and underbanked are also missing other services as well.  Because the underbanked don’t have strong enough relationships with financial institutions, and the unbanked have no relationships at all, they often turn to payday lenders for high interest rate loans or cash advances when they are in a financial bind or need to supplement their income. And considering that payday lenders often have service fees ($15 – $20 per loan term) plus outrageous interest rates that can range from 300% – 750% (APR), this is a very pricey and risky alternative.  Many people end up paying back $300 – $400 or more to payday lenders for a $100 loan.

Another type of short term loan that has grown in popularity is the car title loan.  Many car owners that are struggling financially are offering their car titles for cash by lenders who are known to charge triple-digit annual percentage rates (think 250%!).  The loan terms are typically pretty short, around 30 days.  The problem is that if the consumer didn’t have a few hundred dollars initially, they are very unlikely to have twice as much money in 30 days to repay the loan.  So, many of these car owners are rolling over their loans for months until the repayment amount is nearly impossible to obtain, and eventually getting their cars repossessed.  The car title lenders are then selling the consumer’s car and keeping 100% of the profit.  And the consumer is left with nothing; no cash and no car. While car title loans are generally considered a “predatory lending” practice, they are not illegal.

So how could being “banked” help in these situations?  Many financial institutions offer short term loans or regular credit cards that would allow someone who is struggling financially to make it through the month, or several months, for much lower interest rates. Even the short term loans and most any kind of loan from a credit union, are offered at rates that are a fraction of those given by payday or car title lenders.

The problem that some people run into is with credit checks/scores.  But part of a long-term solution for this would be to do something like a “credit builder” type loan that many financial institutions offer.  They allow you, if you don’t qualify for a traditional loan, to secure a loan with your own money deposited into an account.  When you make payments to this secured loan, the payment history, etc. will still work to improve your credit score.

And a credit card could also alleviate some frustration and give you more flexibility in months that you are short on cash.  Even if you don’t have the most desirable credit rating, a 19% interest rate is still much better than a 300% interest rate.

There are other reasons that being banked is much better than being unbanked or underbanked.  Here’s one more:  Safety.  If your credit card or check book is stolen, those items can be reported stolen and cancelled.  Even your debit card can be frozen by your financial institution.  But, if your entire paycheck is in your pocket or wallet and is stolen, you will never see that money again.  Not to mention, people that steal wallets, aren’t always nice in their means to get your wallet.

Other reasons to be banked include: having your money protected by the NCUA or FDIC, the helpful budgeting element of online banking that most financial institutions offer, interest bearing accounts, and much more.  If you aren’t yet with an financial institution, the time to get banked is now!