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Beware Check Cashing Stores

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.

In New Jersey, check cashing outlets must be licensed by the state and the license must be conspicuously displayed. There are also limits on fees, which are set by the state Commissioner of Banking and Insurance.

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). Personal checks often have higher fees than 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 outlets 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:

·    New Jersey Consumer Checking Account--This is a non-interest bearing, low-cost account for New Jersey residents who don't write a lot of checks. It is available at banks statewide. The minimum amount required to open a NJ Consumer Checking Account is $50. The monthly maintenance fee is $3 ($36 annually), which includes 8 free checks per monthly statement period. The per-check charge above 8 checks is 50 cents. Consumers can maintain a low balance without incurring a fee or penalty.

·    Credit Unions--Credit unions are non-profit 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.