Pros and Cons of Living Off the Financial Grid
Millions of people in the U.S. live without a bank account. In the financial industry, they are called “unbanked” orÂ “underbanked.”Â Unbanked consumers are those who live without any bank account at all, and underbanked consumers have limited access to traditional financial institutions. When we hear professionals in the financial industry talk about these people, it’s usually with the implication that the un- and underbanked consumers are missing out on something big. Are they?
Why are people unbanked?
Consumers live apart from banks for a variety of reasons. Younger adults and new immigrants, for example, may not understand the way the banking system works or the advantages that accompany a relationship with a financial institution. The most common reasons given for not having a bank account are not having enough money to establish an account, not wanting one, and not needing one.
Interestingly, about half of the unbanked population had an account in the past. Within this group are a large number of consumers who had a negative experience with a financial institution that left them feeling soured and jaded, uninterested in continuing the relationship (or uninvited to). That negative experience usually includes fees. Bank fees can be painful at any income level. But it seems that those who have the fewest resources are charged the most, and the most often (because they are more prone to overdraws and less likely to meet minimum balance requirements).
Getting socked by bank fees
Typical bank fees add up quickly. First the account holder must pay a monthly service fee for simply maintaining the account. While it’s true that many banks offer ways to avoid the service charge, the requirements can be difficult to meet, especially for low-wage earners who don’t have access to direct deposit or internet banking. Next, inconvenient ATM placement may result in fees for cash withdrawals or other transactions. Then, in the case of a misstep that leaves the account in the red, the account holder quickly goes beyond broke, owing money and facing stern, if not aggressive, collection actions. Often, a single bad action leads to a chain of negative events such as multiple overdrafts on the same day. To add insult to injury, the hapless consumer finds that overdraft fees are levied on each of those multiple occurrences on that fateful day. This is true even when he or she has overdraft protection in place. Banks are notoriously unforgiving with regard to waiving or reducing fees, particularly for a consumer who struggles to balance the checkbook. Every person’s situation is different, of course, but these are very common scenarios.
Easy to see why a consumer might become quite disenchanted with the whole banking process, choosing instead to have nothing more to do with a complex system in which he has little or no buffer for error and is completely powerless when things go wrong.
Advantages to living off the financial grid
For some, life is easier without a bank account. There’s no checkbook to balance and therefore no danger of overdrawing the account. Money in hand is the budget. When it’s gone, it’s gone. It’s also free â€“ no monthly service charges and no monthly hoops to jump through to avoid them. For a consumer living paycheck-to-paycheck or with unpredictable income, minimizing monthly expenses is an excellent money management strategy.
Many consumers find money in hand to be much easier to organize. The envelope budgeting system of days gone by is still highly effective, whether done on paper or online. Countless studies have shown that we are much more likely to overspend when we use plastic, so managing cash could result in a much healthier spending plan overall.
If the consumer likewise lives without credit cards, she enjoys a mailbox distinctly devoid of monthly statements showing compounded interest charges and unpaid balances. There’s little or no worry about revolving debt.
Disadvantages to a cash-only lifestyle
Living without a bank account is, at the least, inconvenient. While another customer can log on to the electric company’s website and click to pay the bill using a debit card, someone without a bank account may need to take cash to a storefront that sells money orders and then send in the payment the old fashioned way, using a stamp and envelope. (Note, too, the added cost of the money order and postage.)
Money saved under the mattress earns no interest. Granted, the interest earned by today’s savings accounts is somewhat insignificant (less than one percent). But at least the money is safe and protected from fire, theft and other mishap.
When a need for financing arises, unbanked consumers may be forced to take high-interest loans with very expensive and unfavorable terms. Short-term loan (or “payday” loan) interest rates are considered excellent when under 40 percent, but more often approach 400 percent. By contrast, most credit cards charge APRs of between 12 and 30 percent. Personal loans to qualified bank customers are available for between 8 and 12 percent. Auto loans can be had for zero percent â€“ but not by an unbanked consumer.
Financial relationships are the basis for a credit history and credit score, so an unbanked consumer is likely to have a poor credit score or no credit score at all. Without a good credit score, a consumer cannot qualify for the most advantageous terms on any financial product, be it a mortgage, car loan, microloan, credit card, or even a store account to purchase household goods.
Life without a bank account: is it worth it?
Many unbanked consumers don’t expect to be in a position to buy a home during their lifetime. For these folks and others who live a modest, debt-free lifestyle, there’s no real disadvantage to living without a bank account. Indeed, some unbanked consumers report excellent results from using check cashing services and prepaid debit cards to conduct their regular financial business each month, often at a lower cost than what banks charge for the privilege of maintaining an account.
Eventually, however, many unbanked consumers will do themselves a huge favor by learning financial management and joining the mainstream financial community. More money will stay in their pockets, rather than going toward exorbitant fees and interest charges. To this end, some financial institutions already go to great lengths to provide education and services appropriate to the â€œunderbankedâ€ segment of the market.
Sometimes the best way to learn is through experience. If you’ve been burned by negative financial experiences, it’s ok to get off the financial grid for a while. There’s certainly no shame in paying with cash. It’s wise, in fact, and can be a golden opportunity to get back in touch with your budget and the way you spend money, while you rebuild a financial life slowly and purposefully, with full awareness of the consequences of your behavior.
To those who have no aspirations of seeking financing for a home or other large purchase: don’t sell yourself short. Your goals could change as your finances improve. In any case ,building a good credit history simply opens the doors. It’s your choice whether to walk through them.
Kimberly Rotter is a debt management expert and personal finance writer. She is a regular featured contributor onÂ Credit Card Insider,Â ManillaÂ andÂ Credit Sesame, and her work has appeared on numerous other personal finance sites including Yahoo! Finance, LearnVest and Business Insider.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.