According to a 2019 report by the Federal Deposit Insurance Corporation, approximately 5.4% of American households lack a bank account. While this percentage may seem small, considering the country’s population of over 325 million, it translates to approximately 7.1 million unbanked households. The reasons behind this phenomenon vary. Some individuals believe they lack the financial means to open and maintain an account, while others harbor distrust toward banks due to fees or concerns about their creditworthiness.
However, forgoing a bank account can ultimately result in significant financial drawbacks. Here are some ways in which relying on alternatives to traditional banking services can negatively impact your finances.
You Pay a Ton For Check Cashing
When you receive your paycheck, the expectation is that you should be able to access all of that money. This is typically the case if you have a checking account, as you can deposit or cash your check at your bank without any fees. However, if you don’t have a bank account and need to use a check cashing service, it’s a different story.
We conducted research some time ago on how to cash a check without a bank account, and all the options we found come with fees. These services typically charge a percentage of the total amount of the check to cash it, and these percentages can vary depending on the state. In states like Florida and Maine, for example, you might end up paying as much as 5% of your hard-earned money just to access it. That’s quite a hefty fee! In comparison, monthly bank account fees would likely cost you less in the long run.
You Are Forced to Pay Money Order Fees
I haven’t come across a money order in quite some time. That’s likely because handling rent, mortgage payments, or utilities has become much simpler with a checking account. With a checking account, you can easily write a paper check and mail it or set up online bill payment through your bank. However, if you don’t have a checking account, you’ll need to resort to purchasing a money order with cash.
Money orders typically come with fees, usually around $1.15 for amounts up to $500, or $1.55 for amounts between $500 and $1000. While these fees may not seem significant, money orders have a maximum limit of $1000. This means that for larger bills, like rent, you may end up incurring multiple fees.
Moreover, obtaining a money order involves additional hassle. Unlike paying via check or online, which can be done from the comfort of your home, getting a money order requires a trip to a USPS or Western Union location, or a similar service provider. You’ll then have to wait in line and coordinate the transaction with the cashier, which can further delay your bill payments.
This inconvenience is exacerbated during the ongoing pandemic. Longer lines and wait times at service locations increase the risk of exposure to the virus, especially considering the close proximity to other individuals. It’s certainly not an ideal situation for anyone concerned about their health. Save yourself the frustration, time, and extra fees (and potentially your health) by simply opening a bank account.
You’ll Likely Use a Prepaid Card (And Pay More Fees)
If carrying a large sum of cash makes you uneasy, prepaid cards might offer a solution. However, they come with a hefty price tag. Essentially, you’re paying a 1-to-5% fee on the money loaded onto the card. On top of that, there are ATM fees (in addition to out-of-network bank fees) if you need to withdraw cash. Some prepaid cards also charge monthly maintenance fees, particularly if you don’t use up the funds quickly enough. Additionally, losing a prepaid card isn’t as simple as misplacing a replaceable debit card.
Furthermore, some individuals struggle to fully utilize the remaining balance on a prepaid card, often leaving small amounts unused. While it may seem insignificant, these leftover dollars can accumulate over time if it becomes a frequent occurrence.
A helpful tip: When a prepaid card is running low, consider transferring the exact remaining amount to your Amazon account. Since many people shop on Amazon.com, this ensures the remaining funds are put to good use. However, this advice may not be practical if you don’t have a bank account, as the likelihood of online shopping without one is minimal.
An alternative option is to use prepaid cards at grocery stores. You can swipe the card with a low balance, and it will deduct as much as possible from that card first. Any remaining balance can then be paid using another payment method. Some stores, like Costco, even allow the use of multiple cards for a single transaction. Of course, another straightforward solution is to simply open a bank account.
Your Credit Cards Choices Are Severely Limited
While most credit card applications typically mandate applicants to possess a bank account, a select few do permit individuals to apply without one. Nevertheless, the premier cards, boasting the lowest interest rates or most lucrative cash back rewards, typically necessitate a bank account. Without a bank account, you might not even be aware that these superior cards are available as options.
You Aren’t Really Saving Without a Bank Account
Being restricted to cash or prepaid cards inhibits your ability to save effectively. Without the option to earn interest or securely store money, saving becomes an afterthought. Stashing cash at home is not a viable long-term solution.
This circumstance often leads to spending all incoming funds each pay cycle, regardless of necessity. With no designated savings account, the inclination is to live paycheck to paycheck, fostering a precarious financial situation.
In Conclusion
While it can be tempting to criticize the banking industry for its practices, it remains the most effective tool for managing finances. Remember, banks are profit-driven businesses. Yet, they offer numerous services for free if you understand their fee structures. By mastering these rules, you can actually turn the tables and benefit from the system.
Conversely, opting out of a bank account leaves you susceptible to higher fees elsewhere. If you dislike bank fees, consider the irony of avoiding banks yet still facing financial drains. How much are you sacrificing by taking a principled stance against banks?
Ultimately, the decision is yours. But from a financial standpoint, eschewing bank accounts leads to increased expenses and diminished control over your funds. That’s a certainty.