What Does It Mean to Be Underbanked?


The Federal Deposit Insurance Corporation (FDIC) reports that in 2021, 4.5% of households in the US, equating to approximately 5.9 million, were unbanked. These households had no access to a checking or savings account at a bank or credit union.

Meanwhile, 14.1% of households, or 18.7 million, were considered underbanked, possessing a bank account yet utilizing alternative financial services such as check cashing, money orders, rent-to-own, or payday loans in the past 12 months.

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What does underbanked mean?

So, what exactly does it mean to be “underbanked”? Simply put, it describes individuals or households that have restricted access to standard banking services, including checking and savings accounts.

Being underbanked can result in serious consequences, like challenges in establishing credit and limited financial options. Through comprehension of the problem, we can strive to discover solutions that aid those who are underbanked.

What does unbanked mean?

Being unbanked refers to individuals or households that lack a bank account. This translates to these individuals having no access to the traditional financial services that many of us take for granted.

Instead, they may have to resort to alternative financial services such as check cashing, payday loans, or auto title loans, which come with steep fees and can entangle them in debt.

It’s crucial to understand that being unbanked does not necessarily mean the individual is financially unstable or poor. It could be due to a lack of trust in banks, limited access to banking services, or the inability to meet account opening requirements.

Despite the reasons, being unbanked can pose difficulties in establishing credit, saving money, and utilizing other financial resources.

Characteristics of the Underbanked Population in the U.S.

Let’s examine the features of underbanked households in detail. Understanding these features can assist us in comprehending the problem and developing effective solutions.

  • Income and job status – Underbanked individuals are more likely to earn low incomes and face unemployment or underemployment.
  • Limited access to traditional banking – As the term suggests, underbanked individuals have limited access to conventional banking services like checking or savings accounts.
  • Use of alternative financial services – To fulfill their financial needs, underbanked individuals frequently resort to alternative financial services such as check cashing, money orders, and payday loans.
  • Who’s affected – The underbanked population is not confined to a specific demographic. It can be seen among individuals of all ages, races, and ethnicities, but certain groups like low-income households, immigrants, and people of color are disproportionately impacted.

What are the consequences of being underbanked?

The negative consequences of being underbanked can significantly impact an individual’s financial stability. A few of these are:

  • Difficulty building credit – Underbanked individuals often face difficulties in establishing credit, hindering their ability to secure loans or avail other financial opportunities in the future.
  • Limited financial options – Without access to affordable banking services, the underbanked can miss out on savings accounts, credit cards, and loans with better terms and conditions.
  • Increased risk of financial fraud – Lacking access to trusted banking institutions, the underbanked may be more vulnerable to financial fraud and exploitation by predatory lenders.
  • Obstacles to saving and wealth accumulation – The underbanked may struggle to save money and grow their wealth due to limited access to financial services.

What are the solutions for the underbanked?

What are the possible solutions for the underbanked? The following approaches can aid in increasing access to financial services and promoting better financial decision-making for the underbanked:

  • Financial literacy – Providing financial literacy and counseling can empower the underbanked to comprehend their options and make informed financial decisions.
  • CDFIs – Community Development Financial Institutions (CDFIs) work towards providing financial services and opportunities to underrepresented communities and can serve as a valuable resource for the underbanked.
  • FintechsOnline banks, neobanks, and peer-to-peer lending platforms can improve access to financial services for underbanked individuals. Tools like credit builder loans and secured credit cards can also assist in establishing a positive credit history.
  • Government action – Government policies and programs exist to help underbanked households, including financial education programs, low-income banking initiatives, and more. These efforts can provide much-needed support to those who are underbanked.

What additional actions can one take to build financial stability?

Attaining financial stability is a path that requires perseverance and unwavering commitment, but with the right strategy in place, it’s achievable. Here are some practical steps to help you along the way:

  • Get a bank account – Look for bank accounts from banks or credit unions that don’t require a minimum balance or minimum deposit, and steer clear of those that charge fees. If you’re a newcomer to the country, don’t fret – there are options for non-residents to open a U.S. bank account.
  • Create and stick to a budget – A budget serves as a compass, guiding you through your income and expenses and preventing overspending. Adhere to it as much as possible, and watch as your finances stay on course.
  • Build an emergency fund – Emergencies are an inevitable part of life, and having an emergency fund can provide security and steer you clear of high-interest credit options.
  • Pay off debt – High-interest debt can slowly erode your savings and impede wealth-building over the long term. Prioritizing debt repayment puts you in control of your finances and moves you closer to stability.
  • Save for retirement – The earlier you start saving for retirement, the more secure your financial future will be. Even small contributions can make a big impact over time.
  • Invest your money – By investing your money, you’re giving it the chance to grow and generate a passive income. It’s a proven path to long-term wealth creation.
  • Financial education – A deeper understanding of personal finance empowers you to make better financial decisions and improves your stability over time. Numerous resources are at your disposal, allowing you to continue learning and investing in your financial education.

By taking these steps, you’ll seize control of your financial future and elevate your financial well-being to new heights.

Meet the author

Crediful is your go-to destination for all things related to personal finance. We're dedicated to helping you achieve financial freedom and make informed financial decisions. Our team of financial experts and enthusiasts brings you articles and resources on topics like budgeting, credit, saving, investing, and more.