Making Justice RealThe Official Blog of the Legal Aid Society of the District of Columbia
Unbanked Clients: The Bigger Picture on Financial Health
Earlier this month, Susie Cambria, who regularly blogs on DC budget and policy issues, wrote about how DC’s unbanked population is twice the regional rate, at 11.8% versus 4.3% regionally. This figure is staggering. More than 1 in 10 residents of the District of Columbia, are not utilizing (or unable to utilize) banks, compared to the national average of 7.7%.
What does this mean and why is it important? Many articles and blogs point not only why banking can be so elusive to some, but also to the high cost of being unbanked. They are absolutely right. It is very expensive to be unbanked. Even assuming relatively low fees, an unbanked worker making $20,000 a year spends roughly $430 of her salary in fees – $400 in check-cashing fees (assuming 2% per check) and $30 in money order fees (assuming two money orders a month at $1.25 each). That amounts to more than half of one of her biweekly paychecks. And that is important, because it makes it that much harder to build up a savings if you have to spend money to use your own money.
But I want to zoom out a little farther on why unbanked clients face so many more obstacles than banked clients.
Banking is one of the core tenants of basic financial wellbeing. It’s where we save our money and watch it grow. It’s also where we start to make relationships with financial institutions that can be very important down the line. Here are three important ways banks help to enhance the financial health of clients:
The act of simply having a bank account has been shown to increase the likelihood and amount that individuals and families will put away for emergencies and long-term savings. Having a savings account can make the behavior of savings a more intentional act, therefore leading to higher financial yields.
A source of credit with reasonable terms
Today there are multiple sources of loans available for unbanked clients, including payday and title lending companies, pawnshops, and online lending companies. Despite the multitude of alternatives to bank loans, these options usually come at a very high premium, with high fees and sometimes triple digit interest rates. Banks, on the other hand, largely offer more reasonable interest rates and fees, and also largely report all loans to the credit bureaus (unlike many payday loans), making it an opportunity for a client to use a bank’s line of credit to build up their credit history.
A place to build their credit history
In addition to providing the opportunity for a client to build credit based on a loan, having a relationship with a bank can also make it easier to open a bank credit card, especially for those with limited or poor credit history. This opportunity allows for clients to rebuild and repair their credit and improve their financial health over time. It is an especially important alternative to secured credit cards, where many unbanked clients turn to improve their credit, but since many of those cards do not report to the credit bureaus they are unable to improve or build up a client’s credit.
A note about the author:
Since August 2014, I have been working as a financial coach out of Legal Aid to assist clients with their non-legal financial decisions. There is no one solution or approach that works for everyone, which is why the one-on-one coaching advice I provide can be instrumental in helping clients figure out what is best for their situation. For those who are unbanked, opening an account is most certainly an option we consider. If you or someone you know would like to schedule a free appointment with me to discuss a financial issue or goal, please email firstname.lastname@example.org or call 202-386-6687.