To Bank or Not to Bank: That is the Question

According to the Washington Post, a recent FDIC report finds that up to one third of Americans are unbanked (without any bank accounts) or underbanked (have a bank account but do not use bank services like credit cards). This means up to 50 million adults and households nationwide are not participating in the banking system, and thus not building their credit score. Instead, one fourth of households go to pawnshops, payday lenders and rent-to-own services for their financial needs.

Unbanked and underbanked adults report their tight financial situations and high bank charges as their reasons to walk away from banks. However, without the same governmental regulations imposed on banks, services like payday lenders often charge much higher rates. More importantly, although lending from payday lenders versus using credit cards from banks can seem like one debt or the other, the difference is that paying back a payday loan does not help you or your family build the credit score that you need to purchase a home, buy a car or pay for college in the future.

For this reason, use of payday loans and similar services are not recommended. Instead, maintain a bank account and build up your credit with the bank’s services. Although high overdraft and credit card interest fees can seem daunting, you can avoid them in several ways:

  • Create an emergency fund – Set aside a portion of your income for an emergency fund (we recommend maintaining an amount of 1/3 of the household annual income, or 1/6 of your individual income if you live by yourself). Have this fund as the first financial resource you go to in case of an unexpected event.
  • Understand your bank’s services – Take time to read through the services associated with your bank account and credit card. Read even the fine prints. Don’t let technical terms be a barrier – ask a teller to explain unclear services, different fees and conditions to you. Knowing details about your bank account will help you take advantage of the bank’s services instead of the often unregulated alternatives.
  • Use a credit card, but with caution – Using a credit card is the most common and simplest way to build up your credit – as long as you pay the balance on time. Credit cards can make it easy for a buyer to overspend and get into debt, which will multiply over time with interest. To avoid this, consider before every purchase: Do you really need it, and can you really afford it? It’d be helpful also to understand credit and credit card use – and you can start right now by browsing through our posts under the tag “credit.”

Have you gone to a payday loan service instead of your bank in the past year? What are some other concerns do you have with having a bank account?

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