Low- and moderate-income (LMI) households with children often face considerable difficulties in ensuring enough financial resources for an adequate diet. One puzzle in the food security literature is why some LMI households are able to meet their food needs while otherwise similar households cannot. A potential explanation for these differences is the type, mix, and frequency of financial services utilized by these households, particularly the use of alternative financial services (AFS) such as check cashers, income tax refund anticipation loans (RALS), money orders, payday lenders, pawn shops, and rent-to-own outlets. The use of these services could reduce food insecurity if AFS products provide short-term liquidity to purchase food during a budget shortfall. However, if the high fees associated with these AFS products crowd out spending on other household necessities or create debt, over the longer term, AFS products could increase food insecurity.

This paper analyzes the use of AFS by households with children at risk for food insecurity to estimate the relationship between the use of specific AFS products and food insecurity. To do this, I use a unique, nationally representative dataset of households with children in both the December 2008 Current Population Survey (CPS) Food Security Supplement and the January 2009 CPS Unbanked and Underbanked Supplement. By combining households in both surveys, I can examine how AFS products contribute to the incidence of food insecurity and very low food security among households with children.

Preliminary results suggest an association between the use of AFS products and the incidence of food insecurity and very low food security in households with children. A large, positive correlation exists between food insecurity and the use of check cashers, money orders, payday lenders, pawn shops, and income tax RALs. Small and insignificant correlations are found between rent-to-own outlets and the incidence of food insecurity. While these estimates are not causal due to the presence of unobservable preferences that may affect both the use of AFS products and food insecurity, preliminary estimates may assist the USDA to better identify children at-risk for food insecurity. Additional analysis relying on differences across states in their legal and regulatory framework affecting AFS products will provide the opportunity to investigate a possible causal relationship between these products and food insecurity.