Popular Alternative Financial Services Dangerous Territory For Consumers

(Photo by Christopher Furlong/Getty Images)

(Photo by Christopher Furlong/Getty Images)  (2011 Getty Images)

If you don’t want to use a traditional bank, you may be drawn to so-called “alternative financial services:” payday loans, prepaid debit cards, check cashing - anything outside of the mainstream system. But for all the hype, are AFS’ really a good deal for consumers?

Why do people use alternative financial services?

To be sure, there are valid reasons to not want to go mainstream: You can’t get a checking account or credit card because of a bad credit history, you don’t have or don’t want to give your identifying information, or you simply don’t want to use a bank. In fact, a study by the Pew Charitable Trusts found that the main reason for leaving the banking system was unexpected and hidden fees. Among the unbanked generally, most people cited the lack of money, identification and time; and hidden fees; as their primary reasons.

But are those valid reasons for staying out?

The high cost of AFS

Despite concerns over hidden fees, avoiding checking accounts can be even more costly. Take prepaid debit cards for example: you may have to pay as much as $1 every time you use the card, on top of ATM, account and customer service charges. Then there’s the cost of check cashing, which is usually around $3 per check, and purchasing money orders for when you need to pay out.

Then there are the indirect costs. Studies have found that people with bank accounts are more likely to save money, reducing the chance you’ll have to go to a payday lender in an emergency. Many banks give protection if your debit or credit card is lost or stolen; if you’re using cash, you’re out of luck. Moreover, becoming part of the banking system makes it easier to get credit cards, mortgages, and auto loans in the future.

The security of banking, without the fees

Even if you overdraft often or can’t meet minimum balance requirements, you can find low- or no-cost banking products.

Credit unions often have unconditionally free checking – no matter how much money you have in the account, you’ll never have to pay a monthly fee. These will save you money on ATM and check cashing fees, and can even earn interest. Some also offer second chance checking accounts. If you can’t get a checking account because you’ve been blacklisted on ChexSystems, these can help rehabilitate your credit.

Online banks also tend to have unconditionally free checking, and can have additional perks for international travelers. The Capital One 360 account, for example, doesn’t charge you a foreign transaction fee if you go abroad.

If you find that you overdraw often, you may be better off with a low-cost prepaid debit card. These cards are pre-loaded with funds, so you can never overdraw. Be sure to pick a card that has no per-transaction fees, low or no ATM fees, an ATM network, and a way to load the card with cash for free. If you use direct deposit, your best bet is the American Express Bluebird; if not, other good options include the ATIRAreload, US Bank Convenient Cash and Chase Liquid.

Anisha Sekar runs NerdWallet’s credit card and prepaid debit card comparison products.

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