Some 17 million Americans don’t have a bank account, complicating everything from filing paychecks to paying utility bills. Many are not unbanked by choice. Some are stuck on bank “blacklists” and do not know how to get out; others cannot afford the high fees and balancing demands.
Recovering and becoming “rebanked” is a daunting task for low-income Americans, as the alternative – a patchwork of storefronts of check-cashing, payday lenders, prepaid cards, and money orders – is a costly burden on businesses. finances already strained. Many do not know where to turn for help.
This is why the US Department of the Treasury examines how local governments, nonprofits, and the financial services industry can better connect and help the unbanked get banked. Last month, the agency launched a new initiative, the Financial Empowerment Innovation Fund, which will fund research into ways to improve access and education to financial services.
When she went to college, then 18-year-old Luann Algoso applied for multiple credit cards and ran into significant debt, which resulted in her bank account being closed at the age of 21.
Toni Greaves for NBC News
“I wasn’t getting any advice… I was too ashamed to tell anyone I had all this debt,” said Luann Algoso, Portland, Oregon resident and graduate student. “It wasn’t a talking point that I wanted to bring up with my roommates even though I was close to them.”
Now 26, Algoso was 21 when the young overspending on credit cards – “I had no supervision then” – caught up with her. His bank account was closed after accumulating hundreds of dollars in overdraft and related penalty fees.
When she found herself paying $ 40 or $ 50 to cash paychecks at Western Union, “I quickly realized the importance of having a bank account,” said Algoso.
Enter the general financial public
That’s typical, said Jose Quinonez, CEO of Mission Asset Fund, a nonprofit that helps low-income families access traditional finance. “The problem is people who don’t have [bank accounts] overpay for their financial services, ”he said. On average, unbanked low-income people spend around 9-10% of their annual income on financial services, he said.
“It looks about right,” said Jennifer Rice, who estimated that she paid around $ 250 a month for the four years she was without a bank account.
In 2008, when she was a single mother in West Texas following a divorce, Rice, 44, received a letter telling her that her checking account was being closed.
Rice got a prepaid debit card, but she had to pay a monthly fee of $ 10, plus 99 cents per transaction, and $ 5 each time she wanted to load money onto the card. (This was before the integration of prepaid debit cards reduced the cost of use.)
To pay her bills, Rice used money orders, but she paid both ways: In addition to the roughly $ 3 she paid by money order, her utility company added a $ 5 fee to accept payment from this way, which increased his financial burden.
“It was scary, really scary,” Rice said. After years of being turned down by larger banks or discouraged by high balance requirements on so-called “second chance” accounts, Rice was finally able to convince a small community bank to take her as a client.
Its history is common, say consumer advocates.
“Half of the people who left the banking system did so because of hidden charges like overdrafts,” said Susan Weinstock, director of Safe Checking for the Pew Charitable Trust in the Electronic Age Project.
“Some of them get really angry because they haven’t been told [about the fees] before opening the bank account, ”said Oumi Cissé, financial advisor at the credit counseling organization Clarifi. She said customers were often confused by the profusion of fees and didn’t understand what they were being charged or why.
Many don’t even know they’re blacklisted, Cisse said. “If you are reported in ChexSystems, it may be a problem,” she said.
Credit bureau for bank accounts, ChexSystems cautions banks against potential customers with a history of bad check writing or similar behavior. As transactions shifted to debit cards and banks began to rely more on income from overdraft fees, a system designed to detect fraud became one that trapped the uninformed, confused, or just plain unlucky. . As with other consumer credit bureaus, consumers have the right to view their report and request that errors be corrected, but that may be easier said than done, Cisse said.
“From the various conversations I have with clients, they have no idea ChexSystems and no idea how to request a report and they just give up,” she said.
That’s why financial education is crucial, said Kasey Wiedrich, senior research director at CFED. A program funded by the U.S. Treasury Department and operated in conjunction with an existing program that helped New Yorkers exit public aid found that a bank account and financial education yielded benefits.
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“We have found, even for the very financially vulnerable, positive impacts of counseling,” said Wiedrich. “The percentage of past due debts was considerably lower… People were paying their bills on time, which is the most important part of a credit score. “
Being unbanked also goes hand in hand with having a bad credit score or not having enough credit history to have a rating at all.
“Our financial education is really focused on the credit system,” said Quinonez, whose group works primarily with Latino immigrants. “We tell them what FICO and the credit bureaus are, what goes into their credit rating… In some cases, a lack of identification or a language barrier can also be a problem.
Loans out of reach
The ramifications are far-reaching. “If they don’t have a bank account, they don’t have a relationship with any bank, so the likelihood that they can get a loan if they need it… is really zero,” Cisse said. This makes them vulnerable to high interest payday lenders and may prevent them from buying a car or a house.
“I couldn’t do anything… I can’t open an account, I can’t buy a car, I can’t buy a house. I was really struggling,” said Oumar Ba, 52, from Philadelphia. .
Ba, who emigrated from Africa 16 years ago, has two jobs but said he could never progress. “I spared nothing for six, seven years,” he said.
It’s harder for people to save money without a bank account, Weinstock said. They might be able to load funds onto a prepaid card, but most of these cards have caps and don’t allow users to funnel money into a dedicated savings track.
This leaves an already vulnerable population even more exposed to the fallout from an economic downturn. “One of the things we learned is that people who had a bank account weathered the economic storm better than those who didn’t,” Weinstock said. About two-thirds of people with a bank account were able to save money at least part of the time, compared with less than 10% of those without.
In 2012, Ba signed up with Clarifi and opened a savings account, followed by a checking account six months later. Now he says he is able to save money and is working on improving his credit so he and his wife can buy a house.
“Things are improving,” he said. “I manage my accounts now. I see where my money is going… It’s wonderful.”
—By Martha C. White of NBC News