Personal Finance

23% of low-income Americans are living without a bank account

Published

3 months ago

August 2, 2024

Business Finance News

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Even as many Americans go cashless, some don’t have the option to choose that lifestyle.

About 6% of Americans were unbanked in 2023, meaning they’re living without access to any traditional financial services such as savings accounts, credit cards or personal checks, according to data from the Federal Reserve.

This share of the population grows to 23% when only considering people making less than $25,000.

The unbanked are more vulnerable to predatory lending practices and their cash is more at risk, financial experts say. This issue disproportionately affects Black and Hispanic adults, Fed data shows, putting financial institutions and local organizations in a position to build trust within marginalized communities.

“Oftentimes the most vulnerable among us, who need the resources most efficiently, aren’t able to get access,” said Wole Coaxum, CEO of MoCaFi, a fintech company serving the unbanked and underbanked.

Young adults, people of color are more often unbanked

Black and Hispanic adults are 14% and 11%, respectively, more likely to be unbanked than white (4%) and Asian (4%) adults, according to the Fed.

This doesn’t come as a surprise to Joe Lugo, founder and CEO of J^3 Creations, a Clearwater, Florida-based consulting business that helps organizations become more culturally sensitive.

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Much of the disconnect between financial institutions and communities of color, he said, can be attributed to a lack of banks in their neighborhoods.

“There is a subliminal message being sent to the community from generation to generation,” Lugo said. “When they don’t see a financial institution or a bank, [they] tend to say, ‘There’s no avenue for me this way. If I had a dream to start a business or buy a home, that’s not for me because they don’t exist here.'”

Many rural areas of the U.S. also tend to be banking deserts, largely because of a lack of population density, according to Darrin Williams, CEO of Southern Bancorp, Inc., a community development financial institution that serves rural and minority communities in the mid-South.

“In many of the markets we serve, we’re the only bank in town,” Williams said. “Often competition of the bank is a payday lender or some predatory provider of capital.”

Younger adults are also more likely to be unbanked.

Of 18- to 29-year-olds, 11% are living without a bank account, compared to 9% of 30- to 44-year-olds, 5% of 45- to 59-year-olds and 2% of people 60 and older, according to the Federal Reserve.

Part of this can be explained by Generation Z’s mindset toward banking, said Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners. She is also a member of the CNBC Advisor Council.

“They feel like banking is something that is old school and traditional and there’s not a fit for them,” said Sun, who is the mother of a Gen Zer. “It’s an opportunity for us to talk to them about why they need to bank and how to open an account that works for them.”

‘They’re getting preyed upon’

Your money is better protected in a Federal Deposit Insurance Corp.-insured bank account, experts say, rather than keeping cash at home or stored in a Venmo or Cash App account, which are not FDIC insured.

It’s not always easy to tell which fintech services offer FDIC deposit insurance coverage, and the Federal Deposit Insurance Corporation says “it depends.” The American Fintech Council did not respond to a request for comment.

It’s still a good idea to keep some cash on hand in case of emergencies, but putting money in an inexpensive or free checking account can help build credit and establish good habits, Sun said.

“It would help you, even if it’s just small amounts, to start to build that savings pattern so that you can save for the future and other financial goals, too,” she said.

People without bank accounts might also turn to check cashing services or consider payday loans, especially if they’re the only brick-and-mortar financial services in their neighborhood. These each come with risks, such as steep interest rates and a lack of federal insurance, said Preston Duppins, a senior partner and financial advisor at Florida-based Vilardi Wealth Management.

“They’re getting preyed upon,” Duppins said about people taking out payday borrowers.

“And they don’t have the pull to get Congress to change payday loan laws,” he added.

The Community Financial Services Association of America, which represents payday lenders, did not respond to a request for comment.

Building trust

To get the unbanked to trust financial institutions, Lugo, with J^3 Creations, said local leaders and banks must meet people where they are.

“Most of the time, marginalized folks are not willing to venture out of their areas. I think there are some financial institutions that are starting to get it” said Lugo, who also co-founded the Hispanic Chamber of Commerce of Pinellas County.

“They’re going out into the community, they’re promoting their services into the community, they’re creating programs specifically for the community,” he said.

It’s one thing that Coaxum says MoCaFi aims to do. The fintech company, he said, initially assumed people who were unbanked or underbanked would readily adopt their free bank account offering with accessible ATMs. However, it wasn’t so simple, and Coaxum said the company’s “sophistication bias” impeded its ability to recruit customers.

The company shifted over time to partner with governments to distribute benefits like universal basic income programs, which gave recipients a reason to use the platform.

“Giving them access to some benefit and then using that conversation as a way to be able to get them into our demand deposit account is how we shifted,” Coaxum said.

Other ways to build trust are through education and representation, experts say. As a Black financial advisor, Duppins says he doesn’t see a lot of people who look like him in his field.

“I spend a lot of time in my community. I don’t segment people by their access, because that means segmenting people who look like me,” Duppins said. “We need to continually focus on women, women of color, men of color in this space, in this banking industry.”

Personal Finance

Maximum Social Security retirement benefit: Here’s who qualifies

Published

2 hours ago

October 17, 2024

Business Finance News

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Millions of Social Security beneficiaries will benefit from the 2.5% cost-of-living adjustment for 2025, set to take effect in January.

With that increase, the maximum Social Security benefit for a worker retiring at full retirement age will jump to $4,018 per month, up from $3,822 per month this year, according to the Social Security Administration.

But while those maximum benefits will see a $196 monthly increase, retirement benefits will go up by about $50 per month on average, according to the agency.

The average monthly benefit for retired workers is expected to increase to $1,976 per month in 2025, a $49 increase from $1,927 per month as of this year, according to the Social Security Administration.

Who gets maximum Social Security benefits?

The highest Social Security benefits generally go to people who have had maximum earnings their entire working career, according to Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities.

That cohort generally includes a “very small number of people,” he said.

Because Social Security retirement benefits are calculated based on the highest 35 years of earnings, workers need to consistently have wages up to that threshold to earn the maximum retirement benefit.

“Very few people start out at age 21 earning the maximum level,” Van de Water said.

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Workers contribute payroll taxes to Social Security up to what is known as a taxable maximum.

In 2024, a 6.2% tax paid by both workers and employers (or 12.4% for self-employed workers) applies to up to $168,600 in earnings. In 2025, that will go up to $176,100.

Notably, that limit applies only to wages that are subject to federal payroll taxes. If a wealthy person has other sources of income, for example from investments that do not require payroll tax contributions, that will not affect the size of their Social Security benefits, said Jim Blair, vice president of Premier Social Security Consulting and a former Social Security administrator.

How can you increase your Social Security benefits?

There are beneficiaries who are receiving Social Security checks amounting to more than $4,000 per month, and they usually have waited to claim until age 70, according to Blair.

“Technically, waiting until 70 gets you the most amount of Social Security benefits,” Blair said.

By claiming retirement benefits at the earliest possible age — 62 — beneficiaries receive permanently reduced benefits.

At full retirement age — either 66 or 67, depending on date of birth — retirees receive 100% of the benefits they’ve earned.

And by waiting from full retirement age up to age 70, beneficiaries stand to receive an 8% benefit boost per year.

By waiting from age 62 to 70, beneficiaries may see a 77% increase in benefits.

However, because everyone’s circumstances are different, it may not always make sense to wait until the highest possible claiming age, Blair said.

Prospective beneficiaries need to evaluate not only how their claiming decision will impact them individually, but also their spouse and any dependents, he said.

“You have to look at your own situation before you apply,” Blair said.

Also, it is important for prospective beneficiaries to create an online My Social Security account to review their benefit statements, he said. That will show estimates of future benefits and the earnings history the agency has on record.

Because that earnings information is used to calculate benefits, individuals should double check that information to make sure it is correct, Blair said. If it is not, they should contact the Social Security Administration to fix it.

Personal Finance

Inherited IRA rules are changing in 2025 — here’s what to know

Published

3 hours ago

October 17, 2024

Business Finance News

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What to know about the 10-year rule

Before the Secure Act of 2019, heirs could “stretch” inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes.

But certain accounts inherited since 2020 are subject to the “10-year rule,” meaning IRAs must be empty by the 10th year following the original account owner’s death. The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts.

Since then, there’s been confusion about whether the heirs subject to the 10-year rule needed to take yearly withdrawals, known as required minimum distributions, or RMDs.

“You have a multi-dimensional matrix of outcomes for different inherited IRAs,” Dickson said. It’s important to understand how these rules impact your distribution strategy, he added.

After years of waived penalties, the IRS in July confirmed certain heirs will need to begin yearly RMDs from inherited accounts starting in 2025. The rule applies if the original account owner had reached their RMD age before death.

If you miss yearly RMDs or don’t take enough, there is a 25% penalty on the amount you should have withdrawn. But it’s possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years, according to the IRS.

Consider ‘strategic distributions’

If you’re subject to the 10-year rule for your inherited IRA, spreading withdrawals evenly over the 10 years reduces taxes for most heirs, according to research released by Vanguard in June.

However, you should also consider “strategic distributions,” according to certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

“It starts by understanding what your current marginal tax rate is” and how that could change over the 10-year window, he said.

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For example, it could make sense to make withdrawals during lower-tax years, such as years of unemployment or early retirement before receiving Social Security payments.

However, boosting adjusted gross income can trigger other consequences, such as eligibility for college financial aid, income-driven student loan payments or Medicare Part B and Part D premiums for retirees.

Personal Finance

Nearly 2 in 5 cardholders have maxed out a credit card or come close

Published

7 hours ago

October 17, 2024

Business Finance News

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Between higher prices and high interest rates, some Americans have had a hard time keeping up.

As a result, many are using more of their available credit and now, nearly 2 in 5 credit cardholders — 37% — have maxed out or come close to maxing out a credit card since the Federal Reserve began raising rates in March 2022, according to a new report by Bankrate.

Most borrowers who are over extended blame rising prices and a higher cost of living, Bankrate found.

Other reasons cardholders blame for maxing out a credit card or coming close include a job or income loss, an emergency expense, medical costs and too much discretionary spending.

“With limited options to absorb those higher costs, many low-income Americans have had no choice but to take on debt to afford costlier essentials — at a time when credit card rates are near record highs,” Sarah Foster, an analyst at Bankrate, said in a statement.

As prices crept higher, so did credit card balances.

The average balance per consumer now stands at $6,329, up 4.8% year over year, according to the latest credit industry insights report from TransUnion.

At the same time, the average credit card charges more than 20% interest — near an all-time high — and half of cardholders carry debt from month to month, according to another report by Bankrate.

Carrying a higher balance has a direct impact on your utilization rate, the ratio of debt to total credit, and is one of the factors that can influence your credit score. Higher credit score borrowers typically have both higher limits and lower utilization rates.

Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have.

As of August, the aggregate credit card utilization rate was more than 21%, according to Bankrate’s analysis of Equifax data.

Still, “if you have five credit cards [with utilization rates around] 20%, you have a lot of debt out there,” said Howard Dvorkin, a certified public accountant and the chairman of Debt.com. “People are living a life that they can’t afford right now, and they are putting the balance on credit cards.”

Generation X at risk

Gen X most likely to max out their credit cards, survey finds

More than any other generation, Gen Xers in their 40s and 50s are most likely to have maxed out a credit card or come close in the past two and a half years, according to Bankrate’s report.

Of Gen Xers, 27% have maxed out their credit cards compared to 23% of millennials and 17% of Baby Boomers. Young adults in Gen Z are the least likely to have maxed out a card, according to the survey, which polled more than 3,500 adults, including 3,015 who are credit cardholders and 1,104 who have either maxed out their credit cards or come close.

Gen X, the so-called “sandwich generation,” must contend with supporting the generations ahead of them and their children at a time when the costs of higher education and health care have never been higher, studies also show.

Potential problems ahead

Cardholders who have maxed out or come close to maxing out their credit cards are also more likely to become delinquent.

Credit card delinquency rates are already higher across the board, the Federal Reserve Bank of New York and TransUnion both reported.

“Consumers have been measured in taking on additional revolving debt despite the inflationary environment over the past few years, although there has been an uptick in delinquencies in recent months,” said Tom McGee, CEO of the International Council of Shopping Centers.

A debt is considered delinquent when a borrower misses a full billing cycle without making a payment, or what’s considered 30 days past due. That can damage your credit score and impact the interest rate you’ll pay for credit cards, car loans and mortgages — or whether you’ll get a loan at all.

Some of the best ways to improve your credit standing come down to paying your bills on time every month, and in full, if possible, Dvorkin said. “Understand that if you don’t, then whatever you buy, over time, will end up costing you double.”