Texas Trust Money Management Advice

Money Management

Check-Cashing Services

Check-cashing services offer a fast and easy way to cash a check, and they may be the only way to cash a check for those who do not have a bank account. That may make you think check-cashing services are a low-income-friendly service to help people without bank accounts get the money they worked for, but you'd be wrong.

Check-cashing services are notorious for high fees. And the high fees that take a chunk of each cashed check make it difficult for low-income individuals to break out of the cycle of check-cashing services and open a bank account. Below, we will discuss check-cashing benefits, how they work, and their advantages and disadvantages.

What Are Check-Cashing Services?

First, it's essential to clarify that check-cashing services are not banks and do not provide the complete list of services that a traditional bank offers. Instead, they provide a limited variety of financial services, including issuing money orders, making electronic bill payments, and, of course, check-cashing. Their products and services are simple, consumer-based transactions, and these companies may also provide payday advances and loans.

While you may have never used a check-cashing service, their consumer base is surprisingly large. Financial Services of America (FiSCA), which represents this industry, states there are about 13,000 of these neighborhood financial service centers in the United States. It is a $106 billion industry, catering to 30 million people every year. In addition to these financial service centers, some retail stores like Walmart offer check-cashing services in addition to their retail services.

How Do Check-Cashing Services Work?

In general, check-cashing services work by charging you a fee for cashing your check or providing other financial services. Typically, the cost of cashing a check will vary by state and depend on the check amount, and fees can range between 1% to 12%. If a person is cashing a $1,000 check, they'll pay anywhere from $10 to $120 in fees.

There are many reasons for someone to use a check-cashing service instead of a bank. Reasons include:

  • Having poor credit and debt.
  • Not wanting to pay the fees associated with traditional banks.
  • Not having access to a nearby bank.

So for many people, these check-cashing services are necessary to get their hard-earned money in hand. The Federal Reserve Board estimates that as of 2019, 6% of U.S. adults do not have a bank. While this may seem like a small number, it is far from negligible, as it makes up millions of Americans. Because so many Americans are "unbanked," there is a need for alternative systems so that people can still receive their checks.

Advantages and Disadvantages of Check-Cashing Services

Advantages:

While the cons to cash-checking are undeniable, people still them out of necessity. Therefore, the most significant advantage of check cashing is that it is necessary for unbanked people who have no other way to cash their checks.

Another advantage is that they are quick and easy to use so that you can get your money almost instantly.

Disadvantages:

The disadvantages usually outweigh the advantages, and yet, for some people, there is no other option. For those who have no other choice and use these services out of necessity, perhaps the most significant disadvantage is the high fees they pay on their checks.

These high fees take a toll on their income and make it harder for them to save up enough to pay off debts, get good credit, and eventually open a bank account. As a result, people who frequently use check-cashing services become stuck in a low-income cycle with little to no bank accessibility and high fees.

Takeaway

While the disadvantages to check-cashing are clear, for some people, it's a simple fact of life that they rely on these services. For those who don't have a local bank nearby, have poor credit and debt, or can't afford the fees with a bank, check-cashing may be their best or only option. Therefore, the takeaway is that if you can avoid these services, you should. If you can't avoid these services, it is best to save up as much as possible and find some way to set up a bank account that will save you much more money down the line.

Please note, information and interactive calculators are made available to you as self-help tools for your independent use and are intended for illustrative purposes only. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.