Instead of building credit, they’re paying high fees at check-cashing stores.
Hispanics who were born elsewhere and moved here have something in common: Many don’t put their money in bank accounts.
Instead, they use check-cashing stores to pay their bills – which charge them higher fees than any bank would. A new poll by TD Bank says 17 percent of Hispanic households – a total of 9.6 million – “used a check cashing service within the past three months.”
Of those surveyed:
- 28 percent used a check cashing store to send money
- 19 percent visited a check cashing store to cash a check
- 13 percent used their services because of convenience
- 12 percent said because of need for cash
There are however many drawbacks for Hispanics using check cashing stores as alternatives to banks. Those who emigrated from countries with unreliable bank systems don’t understand the consumer protections that U.S. banks offer, and often fall victim to predatory lenders, explains Consolidated Credit’s Community Development Manager Beatriz Hartman.
“One major disadvantage of check cashing stores as alternatives to banks is that some offer payday loans. These loans come with high-interest rates and if the loan is not paid back on time, late fees can lead to debt. They can prove to be risky and expensive in the long run,” says Hartman.
Despite this and other possible pitfalls, it’s the ease and convenience that keep clients coming back. Some check-cashing stores are open 24 hours a day and banks are not. They don’t require social security numbers and let only your money speak for you.
As a result, check cashing stores have become the bank of the unbanked – that is, those who have never owned a bank account. Consumers can pay their bills, cash their paychecks and send money all just within walking distance of their homes. For these reasons check cashing stores have gained a foothold among Latin Americans and those from the Caribbean, especially those who have never used banks to do transactions in their countries of origin.
Included in Bankrate’s top reasons for being unbanked Latinos is unemployment, avoiding debt collectors, having a poor credit history, bad customer service and unexplained banking fees.
But there is another reason so many Hispanics are unbanked: lack of trust.
Roughly one-third (34.2 percent) of unbanked Latinos reported their dislike of or distrust in banks as one reason they were unbanked, and a little more than one in seven (14.9 percent) unbanked households reported this to be the main reason, reports the FDIC.
“Hispanics – especially those who were born outside of the U.S. – don’t have a culture of trusting banks because of negative experiences in their home countries. Their lack of trust means they do not understand what banks can do to help them financially,” explains Hartman.
The US banking system is intricately tied to credit building. Whereas, in most Latin American countries there is no established credit system and cash is king. In fact, the concept of building credit is completely foreign.
In countries where the words owing and borrowing are often associated with lack and poverty, credit is not synonymous to wealth building. For many new immigrants who believe in cash transactions, credit simply means debt. Therefore, it’s important to know how credit works in order to maintain a good financial balance.
A few costly consequences being unbanked
Not Building Credit
The unbanked usually have a more difficult time getting a credit card and don’t have any official record of how they pay their bills, which are two key factors in building credit. Prepaid cards that you can get at check-cashing stores are not linked to your social security number and are not reported to credit bureaus, nor will transactions using prepaid cards assist your credit score.
Lack of secured or structured means to save.
Bank account holders are often more conscious of how their money is spent. They can use their bank statements to review their monthly spending and to note recurring or unnecessary expenses, which helps them to budget more wisely. The unbanked have no secure means of storing their savings and run the risk of being victimized when accumulating large amounts of cash to fulfill long-term financial goals.
The unbanked are often saddled with exorbitant fees and interest rates and are left open to the guises of predatory lenders. A survey by the Federal Reserve Bank of St. Louis states that a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees, which is more than the fees charged on a monthly checking account.