A new report from cardhub.com confirms a financial paradox: The less money you have, the more expensive life can get.
The financial website's report studied the annual costs of 65 checking accounts from 25 big banks and compared their relative costs for five theoretical categories of spenders. By far, people in the "cash strapped" category would have to pay the most to use a checking account, on average, compared to customers with more money and more reliable income.
"The less money you have, the more it costs to have a checking account," the report states, noting that the average cost of an account for the "cash strapped" category was nearly $500 a year.
That sounds about right to Greg McBride, chief financial analyst for bankrate.com. McBride said those with small or irregular incomes get hit two ways: Banks sometimes require customers to maintain a certain amount of money in their checking accounts or require regular direct deposits before fees are waived.
"With low income or irregular income, it's more difficult to maintain a balance requirement or you don't have a regular direct deposit," he said. "Those are really the two most common fee waivers. Either of those, you're more likely to incur a monthly fee."
CardHub's hypothetical "cash-strapped" consumer did not have direct deposit. She had no savings account or line of credit in case of emergencies-and she had opted in to overdraft protection, meaning that when she buys something she doesn't have enough money for, the purchase will go through, but she'll have to pay fees. CardHub's calculations were based on the cash-strapped consumer incurring 12 overdrafts per year.
Checking account fees hit low-income customers particularly hard, according to McBride.
"Whatever fees you incur, they represent a bigger percentage of a small balance and low income," he said.
And the lack of a savings account or other emergency preparedness can spark a downward spiral of financial insecurity.
"Without a sufficient savings cushion, you're more prone to high-cost borrowing," he said. That can include payday loans as well as "just having to resort to a credit card or some kind of personal loan. Any of that's going to be high-cost credit that could be avoided if you have an emergency savings cushion."
CardHub's study included only the 25 largest banks as measured by FDIC reports. McBride said there are still checking accounts with no monthly fees-you just have to know where to look.
"We still find a little more than a third of checking accounts are free. They're still widely available at credit unions, more than 70 percent of credit unions offer free checking," he said. "That's really the goal people should set for themselves."