Have you heard that you are underbanked or unbanked? That term is being used increasingly, but what does it mean to you as you work to grow your financial health and well-being?

Millions of people in the United States fall into this category. It means they do not use a bank account, as was traditional over the last decades. Some use one sparingly, and others use one very limitedly. Why is that a problem? What can you do about it?

What Does It Mean to Be Underbanked?

The Federal Deposit Insurance Corp. (FDIC) is an agency that uses this term. They describe the definition as a person that does not have a savings account or a checking account with a traditional credit union or a bank. Instead, they use other tools to manage their money. This could include prepaid debit cards. It may consist of money orders or the use of bill pay services. Some will use payday loans to cash a check, while others may use retail check cashing services.

It may not seem like this is a big deal, but it can be for many people. That’s especially true when you are paying high fees for using these other services. If your paycheck is $500 and you must pay $50 in check cashing fees, you lose 10% of your income.

You’re:

• Underbanked – If you have a checking or savings account but you do not use it often.
• Unbanked – You do not have a bank or credit union for paying bills, borrowing money, or cashing checks.

Why does this happen? There are various reasons for it, but the FDIC shares that many people do not think they have enough money to put into a bank account. Some people do not trust bank accounts, and others believe there is no point or the account fees could be too high. Still, others lack the proper identification to secure one or may have a history of writing bad checks or overdrawing an account.

Saving Challenges for the Underbanked

What are the challenges for those who are underbanked? Here are some of the reasons why this can be troublesome:

• Limited access to credit: Some may not think credit is important, but to buy a home, buy a car, or qualify for some jobs, you need credit. If you are underbanked, you may not have access to the ability to build a strong credit score to prove your creditworthiness.
• Fees: As noted, there is a cost to using all of these other services. The catch that many people don’t realize is that you do not have to have a lot of money to open a checking or savings account. Many banks do this with $50 and sometimes less. More so, many checking and savings accounts charge no fees, even for your purchases. You’re often spending far more on the fees for other services.
• No tools: Those who are underbanked also lack access to tools that can help them to build their wealth. That includes automatic transfers from one account to another and direct deposit. You may not be able to use savings tools such as money market accounts or CDs, which are typically funded with lower dollar amounts.
• Risk: Another key concern is the risk that comes from these services. If your bank is not FDIC insurance – or you are using any banking service that’s not insured, that puts you at risk. You could lose all of your money if the organization shuts down. That cannot happen with FDIC-insured banks.

Starting the Savings Process

Recognizing the risks of not having access to the funds you need, you may ask the question about what you can do about it. There are a variety of strategies to get your foot in the door, and it’s not easy to get started, but there are some steps you can take.

• Look for a bank offering a second-chance checking account. If you’ve had trouble with outstanding fees with banks before, this could open the door for you to reestablish yourself.
• Look for free banking accounts, both savings and checking. You can find these at most financial institutions, large and small. Be sure they are an FDIC-insured provider.
• Use prepaid debit cards that do not have high fees. Look into online services that offer these accounts without the high costs.

If you’re unsure what option could work for you, invest a few minutes into comparing some possibilities. You’ll find that once you open an account and start using it, you’ll save money, which means having more money in the budget to use for what you want and need.