How to Go From Unbanked or Underbanked to Banked

Most U.S. adults rely on traditional banks and credit unions for their banking needs. Still, a 2022 report (the most recent available) by the Federal Reserve found that 19% of adults in the U.S. in 2021 were either unbanked or underbanked. Here’s what that means, along with strategies for becoming banked.

Key Takeaways

  • People who are unbanked don’t use traditional financial services such as credit cards and bank accounts; instead, they rely on alternative financial services, which are often expensive.
  • Those who are underbanked have some type of bank account but still use cash and alternative financial services to make purchases.
  • Second-chance bank accounts may provide opportunities for people with spotty credit histories to open checking accounts.
  • As the gig economy grows, the financial services industry needs to adapt to evolving banking needs. 

Unbanked vs. Underbanked

According to the Federal Reserve report, 6% of U.S. adults were unbanked in 2021, up from 5% in 2020. The term “unbanked” refers to people who don’t use (or don’t have access to) traditional financial services such as credit cards, personal checks, savings accounts, and loans.

Instead, people who are unbanked use alternative financial services—payday loans, money orders, check cashing services, pawnshop loans, and the like—to meet their banking needs. These financial services fill an important role for unbanked individuals, but they can also cause further financial hardship. They are often expensive, with high interest rates that can lead to increased debt or loss of collateral.

Meanwhile, 13% of U.S. adults were underbanked in 2021. People who are underbanked have some type of bank account but also use alternative financial services to manage their finances and make purchases.

The remaining 81% of adults were fully banked. This means they had a traditional bank account and didn’t use any alternative financial products throughout the year. 

Who Are the Unbanked and Underbanked?

According to the Federal Reserve report, people who are unbanked or underbanked are more likely to have a low income, be less educated, and belong to a racial or ethnic minority group:

  • 17% of people with incomes below $25,000 were unbanked, versus 2% of those with incomes over $50,000.
  • 34% of people with a high school degree or less were unbanked, compared to 1% of those with a bachelor’s degree or more.
  • 13% percent of Black adults and 9% of Hispanic adults were unbanked, versus 3% of White adults, 2% of Asian adults, and 6% of adults overall.

Similarly, people who are underbanked also are more likely to have a low income, less education, and belong to a racial or ethnic minority group.

  • 20% of people with incomes below $25,000 were underbanked, compared to 12% of those with incomes between $50,000 and $99,999. Only 5% of people with incomes over $100,000 were considered underbanked.
  • 38% of people with a high school degree or less were underbanked, versus 7% of those with a bachelor’s degree or more.
  • 27% of Black adults and 18% of Hispanic adults were underbanked, compared to 10% of White adults, 6% of Asian adults, and 13% of adults overall.

These statistics indicate that unbanked or underbanked people also may have historically faced barriers in accessing traditional banking services. 

Banking Deserts

Based on the Federal Reserve report, about one-fifth of U.S. adults use alternative financial services because they either need or prefer to conduct financial transactions outside of traditional banks and credit unions. One explanation is the lack of convenient and affordable banking options in some areas. These “banking deserts” are most common in rural communities, where large financial institutions are hesitant to set up shop due to small populations with limited profit potential. 

According to a report from the National Community Reinvestment Coalition, banking deserts disproportionately impact racial minority populations; 25% of all rural bank closures between 2008 and 2016 occurred in majority-minority census tracts. This is especially problematic because families in these areas “have been shown to have limited mobility and lower rates of computer access,” according to the report, which means that mobile and online banking may not be a practical option for every family.

The negative effects of banking deserts on minority communities are also evident when studying the use of certain government support programs. In a 2021 Harvard Study, researchers found that access to these programs, such as the Paycheck Protection Program (PPP), required applicants to be connected to a financial institution that minority communities on average were not involved with. In fact, according to the study, the lack of access to these financial institutions accounted for a 32% racial disparity in uptake of PPP loans.

Banking deserts are inconvenient for people who want to access traditional financial services, including loans. There are direr consequences. People in banking deserts must opt for higher-cost alternatives, miss out on opportunities to build credit histories, and may be less likely to grow up financially literate. All of these factors create barriers to building wealth.

Discrimination in Banking

Banking deserts are not the only challenge that members of racial minority groups face in building wealth, as racism continues to bolster the racial wealth gap in the U.S.

Redlining—a discriminatory practice that prevented racial and ethnic minority populations from accessing credit—is one factor. While laws today protect borrowers from redlining and other discriminatory lending practices, the consequences of redlining persist today. These lasting consequences adversely affect interest rates, loan approval rates, homeownership rates, and personal wealth.

If you think you have been discriminated against as a mortgage applicant or home buyer, you can file a complaint with the Office of Fair Housing and Equal Opportunity at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau.

How to Become Banked

Unbanked or underbanked people may have been denied a checking account because of past money mistakes or spotty credit histories. Luckily, whether you have problems in your banking history or have never had a bank account before, there are steps you can take to become banked.

Second-Chance Banking

Typically, when you apply for a checking account, the bank evaluates your ChexSystems report, a type of credit report that shows negative bank account actions and activities. If the bank concludes you’re too risky based on the information in the report, then it can deny your application. 

One way to ameliorate a poor credit history is with what’s called a “second chance” bank account. When you open one, the bank either skips the ChexSystems report or overlooks your financial mistakes. That way, you can open a checking account and build a positive credit history to help you move from unbanked to banked. Once you’ve held a second-chance bank account for a specific time, you may be eligible for a standard account.  

By law, you can get a free copy of your ChexSystems report at least once per year. To get it, you can:

  • Request one on the ChexSystems website
  • Call 1-800-428-9623
  • Download and mail a request form to Chex Systems Inc., Attn: Consumer Relations, 7805 Hudson Rd., Suite 100, Woodbury, MN 55125
  • Download and fax a request form to (602) 659-2197

Prepaid Debit Cards

For those who can't get traditional bank accounts, prepaid debit cards are a common way to make online or other cashless purchases. Popular options for prepaid debit cards include the Green Dot Card, Netspend card, and the Walmart MoneyCard.

Some prepaid debit cards will allow you to have a paycheck directly deposited into the card's balance.

While these cards are much better than predatory payday loans and check cashing services that charge significant fees to cash every check, they do still have significant fees of their own. They also don't help you access loans or build your credit history. A full bank account with low or no fees is still a better option than a prepaid debit card.

Secured Credit Cards

Another way to build credit—and transition from unbanked to banked—is to use a secured credit card. With this type of credit card, you make a refundable security deposit that serves as your credit limit and prevents you from spending more than you can afford to repay.

Secured credit cards are ideal for people with bad or limited credit because they are generally easy to get. Additionally, these cards usually have low annual fees and small minimum deposits, and some even offer rewards for everyday spending. Once you’ve used the card for a while and built your credit, you may finally qualify for an unsecured, regular consumer credit card. 

Online Banking

If you live in an area with few in-person banks, you may still be able to qualify to open a checking or savings account through an online bank. Many of these banks have low fees as well as high-yield savings accounts that allow you to start building wealth. Opening an account can usually be done from a smartphone if you don't have a computer.

Credit Unions

Credit unions are an alternative to traditional banks that may be easier for you to access locally. Your employer, worker's union, church, or town might have a credit union that you can qualify to participate in.

Unlike banks, credit unions are owned by their members, not shareholders. They're also nonprofits. This can often allow them to offer highly competitive rates on accounts and loans.

Many credit unions now allow anyone to apply for membership online, though you may need to pay a donation or an annual fee if you don't qualify for traditional membership.

Gig Economy Banking

The gig economy—made up of freelancers, independent contractors, and side hustlers—is changing the banking landscape. With unpredictable incomes, the growing gig workforce demands flexible banking options with fewer fees, lower account minimums, and robust mobile apps. 

Numerous online banks and mobile banking apps now offer fee-free banking geared toward freelancers, small business owners, and entrepreneurs. These accounts often have no minimum balances, no overdraft fees, and access to no-fee ATMs. Search “no-fee checking” to find local and online banking options. 

How Do People Become Unbanked?

Some people who are unbanked never owned a bank account to begin with. This is often as a result of living in an area with no banks or with banks that weren't welcoming to them. Some people become unbanked as a result of closing out a bank account elsewhere with a negative balance. Because of the bank reporting program ChexSystems, if they try to open an account somewhere else, their previous account will prevent them from opening a new one.

Are There Alternatives to Payday Lenders?

The best alternative to a payday lender is to apply for any assistance programs you are eligible for in your area to help you get on your feet and ahead on your bills so you never have to use a payday lender again. You can see what's available in your area by calling 211.

Is a Bank Account Better Than a Prepaid Debit Card?

It depends, but most bank accounts offer lower fees and more services like identity theft protection than a prepaid debit card will. Make sure that you review the terms of service of whatever you sign up for, so surprise fees don't catch you off guard.

The Bottom Line

Almost one-fifth of adults in the U.S. are either unbanked or underbanked. One of the biggest disadvantages of not using traditional financial services is that the alternatives—payday lending, check cashing services, and the like—are expensive. Another disadvantage is that unbanked and underbanked people have limited opportunities to build credit and, ultimately, accumulate wealth. 

Second-chance banking and secured credit cards might be good options to help you build credit and go from unbanked or underbanked to banked. Also, look for banks that offer fee-free checking, so you can keep more of your money. To increase your chances for success, do your best to stick to a budget, spend only what you can afford, and always pay your bills on time.

Article Sources
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  1. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households (SHED)."

  2. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2020—May 2021."

  3. Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2021—May 2022," Page 43, 44.

  4. National Community Reinvestment Coalition. "Research Memo: Bank Branch Closures from 2008–2016: Unequal Impact in America’s Heartland," Page 3.

  5. National Community Reinvestment Coalition. "Research Memo: Bank Branch Closures from 2008–2016: Unequal Impact in America’s Heartland," Page 11.

  6. Harvard University. "The Cost of Banking Deserts: Racial Disparities in Access to PPP Lenders and Their Implications," Page 1.

  7. ChexSystems. "FACTA Free Annual Report."

  8. Federal Communications Commission. "Dial 211 for Essential Community Services."

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