Check-cashing stores charge fees for people to cash a government (e.g., Social Security), payroll, or personal check. They are popular among low-income and elderly consumers and are often located in inner-city neighborhoods where banks and credit unions are scarce or inconveniently located.
Many check-cashing companies also sell money orders, sometimes at twice or one-and-a-half times the cost at a bank or post office. Thus, consumers often pay a check-cashing outlet twice: once to cash their check and a second time to pay their bills with the proceeds.
National surveys of check-cashing store costs have found fees that range from 1% to 20% of the face amount (e.g., $100) of a check. The average cost is usually between 2% and 6% (e.g., a $25 fee on a $500 check is 5% of the face amount). Fees for cashing personal checks are often higher than those for cashing government or employer payroll checks because they pose a higher risk to lenders. Individual borrowers are more likely to “bounce” checks (i.e., write checks against an account with insufficient funds) than a company or a state or federal government.
Check-cashing stores are part of the growing “alternative financial” (a.k.a. “fringe banking”) sector that appeals to “unbanked” households who need a way to access their paychecks, government benefits, and money from other sources. They are also very expensive for consumers. One study found that a family of four with a $24,000 annual income would spend $396 a year to cash paychecks or government checks at an outlet charging a 1.5% fee and to buy six money orders a month.
Fortunately, several good alternatives exist to check-cashing stores. Below is a description of four lower-cost alternatives:
• "Lifeline" Checking Accounts – These are a non-interest-bearing, low-cost account for people who don’t write a lot of checks. Terms and conditions vary according to state law. Consumers can generally maintain a low balance without incurring a fee or penalty.
• Credit Unions – Credit unions are nonprofit financial institutions that serve a group of people with something in common, such as the same employer or church affiliation. About half of all Americans are eligible to join them.
• Electronic Transfer Account (ETAs) – This is an account designed by the U.S. Treasury Department that allows people to receive recurring government payments (e.g., Social Security) electronically through direct deposit for a cost of $3 or less. Account holders are allowed four cash withdrawals and four balance inquiries per month.
• Supermarkets – When you write a personal check for groceries at a supermarket, many stores will allow you to get cash back by writing a check for $10 or $20 more than the total of your purchases if you have a check-cashing card.
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