Ever heard the term “unbanked”? An unbanked household is one where no one has a checking or savings account or even regular access to most banking services. According to MarketWatch, in 2019, only 5.4% of American households were unbanked. This was the lowest rate since the Federal Deposit Insurance Corporation (FDIC) began to keep track of banking trends for Americans in 2009.
But in 2020, that trend may change. High unemployment rates and an increase in poor economic conditions, due to the pandemic may be reversing the progress toward providing banking opportunities to more Americans. So why is this a problem? Because access to banking can provide tools that help people meet financial goals, like buying a house or retiring with a certain standard of living.
Here’s a closer look at the challenges faced by people who are underbanked or unbanked, and what you can do to avoid some of the biggest obstacles to a better financial future.
What it means to be underbanked or unbanked
If you’re underbanked or unbanked, that means you have limited or no access to safe financial services provided by reliable and regulated institutions. This lack of access may force you to rely on expensive financial products like prepaid cards and payday loans. It may also leave you with cash checking fees, higher balance requirements, and excessive loan costs, all of which could limit your ability to save money and avoid debt.
The consequences of being unbanked could make it a challenge for you and your family to build family wealth you can pass on to the next generation. Being unbanked or underbanked also may make it more difficult for an individual or family to build an emergency fund, save for a down payment on a home, or take out student loans to further your education.
Anyone can be underbanked or unbanked, however, you are more like to be at a higher risk if you’re a minority or live in an economically depressed neighborhood. For example, according to data from the FDIC, 60% of Hispanic and Black households with low incomes had no or limited access to banks.
Benefits of being banked
The record low unbanked rate in 2019 helped improve the financial lives of many Americans for the better. Households who had more access to financial services were better able to:
- Protect against fraud: By using the products and services at federally insured banks and credit unions, you may safeguard against fraud on deposits up to at least $250,000.
- Save time: Common online banking tools like automatic bill pay and money transfer services help make banking and financial management more convenient.
- Build an emergency fund: With access to savings accounts and CDs, it can be easier to build and maintain an emergency fund or other types of savings accounts.
Effect of COVID-19 on unbanked households
When the economy is in good shape, like it was in 2019, the number of underbanked or unbanked individuals is more likely to go down. Economic issues and high unemployment rates like those caused by the pandemic, however, may steer more Americans out of traditional bank accounts. According to the FDIC, those who are unemployed are four times more likely to be unbanked. In addition, employees who face drastic pay variations are at a greater risk for not having a checking or savings account.
In addition, Americans who didn’t have access to bank accounts during the start of the coronavirus lockdown had a more difficult time collecting their stimulus checks, which were distributed by direct deposit. Once they finally received their checks, they may have had to use check cashing services to cash their checks, thus losing as much as 1-12% of their check amount.
In addition, as cash became less widely accepted due to the need for social distancing, these same people struggled to pay for groceries and other basic necessities because they were less likely to be have other forms of payment, like a bank-issued credit card. It’s clear that the pandemic left many underbanked families with increasing financial hardship.
What to do if you’re underbanked or unbanked
As we have seen from some of the examples above, being underbanked or unbanked can prevent you from managing your finances and even accumulating wealth or staying out of debt. If you would like to gain more access to banking services, you don’t need to go to a traditional bank. Here are some other options:
- Look into online banks: You don’t have to go to a brick and mortar bank by your house. All you may need to open an account with an online bank may be two forms of identification. A few online bank options include Ally Bank, CIBC Bank USA, and HSBC Direct.
- Try mobile banking: An app like CapWay can allow you to bank online without worrying about minimum balance requirements, monthly fees, or overdraft charges. It’s also full of handy tips on how to improve your finances.
- Don’t use payday loans to manage your debt: Payday loans are pricey and can lead to an increasing cycle of debt. If you’re in debt, debt relief, credit counseling, or even bankruptcy can give you a more reliable and safer way to resolve your debts and get moving in a better direction.
Move toward a better financial future
If you’re currently underbanked or unbanked, you can still take control of your debt and money. For advice on how to do so, check out our free How to Manage Debt guide. It’s designed to help you better manage your debt and find the tools you need to move toward a more secure financial future.
- How to Protect Your Credit Score During the Covid-19 Recession (Freedom Debt Relief)
- Does Unemployment Affect Your Credit Score? (Freedom Debt Relief)
- Can Debt Collectors Wipe Out Your Bank Account? (Freedom Debt Relief)
- What the Unbanked Need From the 2020 Election (Fortune)