According to the Federal Deposit Insurance Corporation (FDIC), approximately 5.9 million households in the US, or 4.5% of households, were unbanked in 2021. This means that none of the household members had a checking or savings account at a bank or credit union.
In 2021, 18.7 million US households, or 14.1%, were underbanked. In other words, they had a bank account but used alternative financial services such as check cashing, money orders, rent-to-own, or payday loans in the past year.
What does underbanked mean?
So, what exactly does it mean to be “underbanked”? In short, it refers to individuals or households that have limited access to traditional banking services, such as checking or savings accounts.
Being underbanked can have significant consequences, such as difficulty in building credit and limited financial opportunities. By understanding the issue, we can work towards finding solutions to help those who are underbanked.
What does unbanked mean?
Being unbanked refers to individuals or households that do not have a bank account at all. This means that these people do not have access to the traditional financial services that many of us take for granted.
It’s important to note that being unbanked does not always mean that the person is financially unstable or poor. It could mean that they don’t trust banks, they lack access to banking services in the area, or they can’t meet the requirements to open an account.
Regardless, being unbanked can make it difficult to build credit, save money, and access other financial resources.
Characteristics of the Underbanked Population in the U.S.
Let’s take a closer look at the characteristics of underbanked households. Understanding these characteristics can help us better understand the issue and develop effective solutions.
- Income and job status – Those who are underbanked are more likely to have lower incomes and be unemployed or underemployed.
- Limited access to traditional banking – As the name implies, the underbanked have limited access to traditional banking services such as checking or savings accounts.
- Alternative financial services – Underbanked individuals often rely on alternative financial services such as check cashing, money orders, and payday loans to meet their financial needs.
- Who’s affected – The underbanked population is not limited to any specific demographic. It can be found among individuals of all ages, races, and ethnicities. However, certain groups such as low-income households, immigrants, and people of color are disproportionately affected.
What are the consequences of being underbanked?
Being underbanked can have numerous negative impacts on an individual’s financial well-being. Here are some of the consequences.
- Difficulty building credit – When you’re underbanked, it can be hard to build credit. This can restrict your ability to get loans or access other financial opportunities in the future.
- Limited financial options – Without access to affordable banking services, the underbanked may miss out on savings accounts, credit cards, and loans with more favorable terms.
- Increased risk of financial fraud – A person who is underbanked may be more susceptible to financial fraud and predatory lending practices since they don’t have access to banking institutions.
- Saving and building wealth – Being underbanked can make it challenging for individuals to save money and accumulate wealth. This is partly due to the lack of access to financial services.
What are the solutions for the underbanked?
What are some solutions that can help the underbanked? These solutions can help increase access to financial services for those who are underbanked, and help them in making better financial decisions.
- Financial literacy – Financial education and counseling can help underbanked individuals understand their options and make better financial decisions.
- CDFIs – Community development financial institutions (CDFIs) are organizations that work to provide financial services and opportunities to underserved communities. They can be a great resource for underbanked individuals.
- Fintechs – Online banks, neobanks, and peer-to-peer lending platforms can help make financial services more accessible to underbanked individuals. Credit builder loans and secured credit cards can also help people build a positive credit history.
- Government action – There are government policies and programs in place that aim to help unbanked or underbanked households. These can include things like financial education programs, low-income banking initiatives, and more.
What additional actions can one take to build financial stability?
Building financial stability is important for achieving financial security and independence. It’s a process that requires consistent effort and commitment. However, it can be done by taking the right steps.
Here are some actions that can help you achieve financial stability:
- Get a bank account – There are numerous bank accounts available that don’t require a minimum balance or minimum deposit. You can also find several bank accounts that don’t charge any fees. And if you’re new to the country, there are ways to open a bank account in the U.S. as a non-resident.
- Create and stick to a budget – Having a budget in place can help you keep track of your income and expenses, and ensure that you’re not overspending. Once you’ve created a budget, you need to stick to it as closely as possible to stay on track.
- Build an emergency fund – Emergencies happen, and it’s essential to have some savings set aside for when they do. Having an emergency fund can help you avoid turning to high-interest credit options and can provide a sense of security.
- Pay off debt – High-interest debt can eat into your savings and make it harder to build wealth over time. Prioritizing paying off debt can help you get a handle on your finances and move towards financial stability.
- Save for retirement – Saving for retirement early can help ensure you have enough money to support yourself in your later years. Even small contributions to a retirement account can add up over time.
- Invest your money – Investing your money can help it grow over time and provide a source of passive income. It can also be a great way to build wealth in the long run.
- Educate yourself about personal finance – Understanding how to manage your money can help you make better financial decisions and improve your financial stability over time. There are many resources available to help you learn more about personal finance and invest in your financial education.
By taking these steps, you can take control of your financial future and improve your financial well-being.