How to Survive in a Banking Desert
When people lack access to traditional banking services, it can be very hard for them to improve their long-term financial health.
You’ve probably heard of food deserts—low-income communities where access to healthy food and grocery stores is pretty much non-existent—but did you know that many of these communities are also banking deserts?
According to research done by the Federal Reserve Bank of New York (among many others), the closing of bank branches post-financial crisis has left many low-income communities (especially ones populated by people of color) with little to no access to traditional banking services.
In the same way that a lack of access to healthy food can negatively impact a person’s health of a community, a lack of access to banking services can harm their financial health as well.
People who live in a bank desert are left with few options for affordable financial services. It’s harder for them to open a bank account, to get a loan, and to build their net worth.
If you live in a banking desert, here are six things you can do to access financial services and, in some cases, improve your long-term financial health.
1. Get an account with an online bank.
All banks have online portals these days where you can pay bills, move money from checkings to savings, etc. But with a traditional bank, you’ll still need a local bank branch for a lot of services. Online banks are different. They don’t have local branches. They are entirely online.
With these banks, you can open up a checking account and receive your paycheck via direct deposit. The bank will also provide you with a debit card that you can use when making purchases. Not having a company-branded ATM can be annoying—and expensive—but most online banks have a deal with certain ATM companies where you can get the ATM fees waived, or at least reduced.
Online banks also offer savings accounts, as well as a number of different investment accounts. Even if you’re living on a tight budget, it’s always a good idea to start socking away money where you can.
Nothing beats having a local banker that you can meet with face-to-face to discuss your finances. But if that isn’t an option for you, then having an online bank account is the next best thing.
2. When all else fails, use a check cashing store.
In areas without bank branches, check cashing stores are where many folks go to get basic banking services. People who don’t have a bank account (and so can’t get direct deposit) go to one of these stores to have their paychecks cashed out.
And that’s not the only services these stores provide. Most of them also do bill payments, public transportation passes, wire transfers, currency exchange, and mail services. They’re a kind of one-stop-shop for basic financial services.
When you get a check cashed at one of these stores, they’ll charge you a one-time fee. It’s usually a set percentage of the check amount. If you brought in a $600 check and the check cashing store charges you a two percent fee, then they would hand you $588 in cash and keep $12 for themselves.
Even a two percent fee is pretty high just to access money that’s already yours. But if you don’t have a bank account, or there aren’t bank-brand ATM’s in your area, it might be your best option—and it is a much better option than taking out a payday loan.
What’s more: people generally seem to like check cashing stores. The fees are one-time, and most stores have their fees clearly posted. People appreciate transparency. In a 2016 article in Business Insider, University of Pennsylvania professor Lisa Servon, author of The Unbanking of America, found that customers at check cashing stores generally reported a very high rate of satisfaction.
3. Avoid payday loans.
This is another service that many check cashing stores provide, but it’s one you should stay far away from.
Payday loans are an extremely common type of small-dollar no credit check loan. They have an average repayment term of only 14 days and annual percentage rates (APRs) that can reach as high as 400 percent—and sometimes even higher! (They are also sometimes referred to as “cash advance” loans.)
With their short repayment terms and high interest rates, many payday loan customers have trouble paying their loans back on time. So, instead, they roll their loan over, extending the due date in return for paying additional interest.
Payday loans are often classified as a “predatory loans” because they are targeted at people with poor credit scores and low incomes. By constantly extending their payday loans, these people can easily get trapped in a never-ending cycle of debt.
If you live in banking desert, there is a good chance that you are surrounded by payday lenders or other stores offering payday loan-like products. Whatever you do, steer clear of them, even if you’re running short on funds. The long-term risks of taking one out are far too great.
4. Get a Secured Credit Card.
If you live in a banking desert, the odds are fairly good that you don’t qualify for a normal credit card. And even if you can, the interest rates are probably much higher than you’d like to deal with.
This is where a secured credit card can help you out. They’re a pretty good financial stop-gap, and they can help you improve your credit score if used correctly.
A loan is called a “secured” loan when it is backed by collateral. Common types of secured loans include home mortgages, which are backed by a house, and auto loans, which are backed by a motor vehicle.
The same holds true for secured credit cards. In this case, the collateral is a cash deposit that also determines your credit limit. For example, if you deposit $500, then you get a $500 limit.
You can use these cards to make purchases the same way you would a regular card. Just make sure you have a system set up to pay the card off regularly. The last thing you want is to be owing lots of extra money towards interest.
One of the advantages of secured credit cards is that most of the card issuers will report your payment information to the credit bureaus. So the more payments you make on-time and longer you responsibly manage your credit limits, the more these positive behaviors will help raise your score. Once your score is high enough, you can graduate to a regular credit card.
5. Look For a Credit Union.
While there might not be a bank that has branches and local services like ATMS in your area, there very well might be a credit union. If there is, it’s a great way to get the service you need.
Credit unions operate a lot like banks except that they are not-for-profit, member-based institutions. Because they are not-for-profit, credit unions invest their profits back into the company. This allows them to offer lower interest rates on loans, higher interest rates on accounts, and lower (or non-existent) fees for their other services.
And whereas a bank will pretty much accept anyone who wants to bank with them, so long as they clear a Chexsystems check, credit unions will not. Eligibility for membership could depend on any number of criteria. It could depend on where you live, where you work, or even what church you belong to.
U.S. credit unions that belong to the National Credit Union Administration (NCUA) can even offer Payday Alternative Loans, which, as the name implies, are a great way to avoid predatory bad credit loans. These loans are between $200 and $1,000, range from one to six months, cannot be rolled over, and come with much lower interest rates than regular payday loans.
Do some research to see if there’s a credit union operating in your area or that you might otherwise qualify to join. Recently, a group of local leaders in Kansas City opened a credit union dedicated to serving the poor, primarily African-American population living in in the city’s urban core.
6. Use prepaid debit cards
If you don’t have a banking account, you still want a way to carry around money without resorting to cash. Because while cash certainly has its benefits, the drawbacks can be pretty severe. For instance, if you are carrying cash and you get robbed, game over. That money is gone.
Folks with bank accounts have it easy. They can simply have money directly deposited into the checking account and then use their debit card for purchases. But if you don’t have a banking account, this option isn’t available to you.
Except that it is. Sort of. With a prepaid debit card, you can load up your cash and be on your merry way.
These cards work a lot like traditional debit cards, only they aren’t tied to a checking account. You put the money on the card directly. This is why they are referred to as “prepaid” cards. By loading up the card with cash, you’ve already “paid” the card provider. They are then free to let you spend down the balance without worrying they won’t get paid back.
There a couple different ways you can load money onto these cards. The best way is direct deposit. Just have your paycheck placed immediately and painlessly on the debit card. You can also a bank branch or ATM from the bank that has issued the card, but that won’t work in a banking desert.
If you can’t do direct deposit, Find a card that allows online or mobile deposits or that has deals with generic-brand ATMs to reload the card on their machines. You should also be able to reload the card at participating retailers, maybe your local pharmacy or grocery store.
One of the downsides to prepaid debit cards is fees. There can be fees for using out-of-network ATMS, activating the card, even making deposits. Some cards come with a regular monthly fee too. This is why using a prepaid debit card isn’t as good an option as having a standard card and checking account. Then again, depending on your circumstances, it still might be one of your best options available.
One last thing about prepaid debit cards: They won’t help build your credit. Since you’ve already deposited the cash, your payment information won’t be reported to the credit bureaus. If you’re deciding between a prepaid debit card and a secured credit card, this is definitely a big check in favor of the secured card—so long as you pay it off on time.
Living in a banking desert is hard. But if you can improve your credit score, the financial tools you’ll have access to will grow.
To learn more about improving your long-term financial outlook, check out these related posts and articles from OppLoans:
- Good Personal Finance for the Long Term with Tim Maurer
- Start Your New Year Out Right: Get a Credit Check!
- Want to Avoid No Credit Check Loans? Build an Emergency Fund