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What Does It Mean to Be Unbanked?
The term “unbanked” refers to individuals who do not have a checking or savings account. According to the Federal Deposit Insurance Corp. (FDIC), about 4.5% of U.S. households were unbanked in 2021, which equates to nearly 6 million households. Managing finances and saving for the future can be more challenging without a bank account, but here’s how you can open one in a few simple steps.
Reasons for Being Unbanked
People who are unbanked do not have deposit accounts at banks or credit unions, including checking and savings accounts. Here are some reasons why someone might be unbanked:
Opening Deposit Requirements
Some financial institutions require an initial deposit of $25 to $100 to open a checking or savings account. This can be a barrier for those living paycheck to paycheck, but not all accounts have these requirements.
Minimum Balance Requirements
Many banks require a minimum balance to be maintained in the account. For checking accounts, this can range from $25 to $100, while savings accounts might require up to $1,000. However, there are accounts with no minimum balance requirements.
Lack of Access
Accessing in-person banking can be difficult without reliable transportation. Online banking may also be challenging for those without a secure Wi-Fi connection.
Documentation Requirements
Most banks require a valid government-issued ID, proof of residency, and a Social Security number or Individual Taxpayer Identification Number to open an account. Not everyone has these documents readily available.
Negative Banking History
ChexSystems tracks deposit accounts and notes any negative activity such as involuntary account closures or unpaid balances. This can deter people from opening new accounts, but it is possible to clean up a ChexSystems report.
Unbanked vs. Underbanked
These terms are often used interchangeably but have different meanings:
- Unbanked: Individuals without checking or savings accounts at banks or credit unions.
- Underbanked: Individuals who have checking or savings accounts but also rely on alternative financial services like check cashing services, money orders, and payday loans.
Downsides of Being Unbanked
Being unbanked comes with several disadvantages:
Security
Checking accounts come with a debit card for daily expenses and bill payments. If lost, you can request a new one and dispute fraudulent transactions. Cash, however, is gone once lost or stolen.
Check Cashing Fees
Without a bank account, cashing checks can incur fees up to 12% of the check amount at check cashing stores.
Inconvenience
Not all retailers accept cash, and shopping online or with merchants requiring a debit or credit card may necessitate using a prepaid card, which can incur fees.
No Access to Checks or Bill Pay Services
Without a checking account, you cannot write checks or use online bill pay services.
Difficulty Saving for the Future
Saving for long-term goals is harder without a bank account. Storing large amounts of cash at home is risky and does not earn interest.
Less Opportunity to Build Credit
Credit scores are crucial for financial health. Being unbanked or underbanked often means fewer credit accounts to help build credit.
How to Open a Bank Account
If you are unbanked, you can still open a checking or savings account. Here are the steps:
1. Research Financial Institutions
Compare online banks, traditional banks, and credit unions. Consider opening deposit requirements, minimum balance requirements, fees, ATM access, physical locations, and customer service reviews.
2. Organize the Necessary Documents
Check the required documents for opening an account, which typically include a government-issued ID, Social Security number or Individual Taxpayer Identification Number, proof of address, birthdate, and contact information.
3. Apply and Fund Your Account
Complete your application online or in person. Once approved, make your initial deposit and start using your account. A strong budget and automatic bill pay can help manage your finances.
The Bottom Line
Checking and savings accounts simplify managing finances and achieving financial goals. Even if you have been unbanked or underbanked, it’s not too late to open an account. While managing your finances, regularly check your credit score and report for free with Experian to maintain strong credit health.
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