by Drew Housman
October 02, 2016
by Drew Housman
October 02, 2016
While even high-earning Americans often struggle with money, making ends meet is particularly difficult for the poor. Americans in the lowest income bracket spend an astonishing 182% of their income. No, that's not a misprint. The poorest people spend a lot more than they earn, often going into debt or depleting savings to make up the difference.
You don't have to be a genius to realize that's a big problem, with far-reaching ramifications for society as a whole. The fact that low-income earners often pay more for the very same products and services than the rest of us can't be helping matters. While politicians and economists grapple with solutions to the larger problem of poverty, it's instructive to look at some of the reasons life in America is actually more expensive on a low income.
Bad Credit = Big Problems
The less money you earn, the more likely you are to have bad credit. While having poor credit might not seem like the end of the world, it can actually keep you from getting a job or an apartment — and it makes life a lot more expensive.
This is never more true than when it comes to the interest owed on loans — which people of all incomes use to finance many of life's biggest purchases, such as homes, education, and cars. People with lower credit scores are a bigger risk to banks, so they must pay higher interest rates — making every one of those purchases (if they can even qualify for the financing at all) far more expensive.
To illustrate this point, let's use the example of a fictional 35-year-old woman named Susan. She lives in Michigan and she has a mortgage on an average house in the Wolverine State. Susan also has a car loan and some credit card debt. You can use online tools to calculate the lifetime cost, in interest, that she'll pay on all this debt.
If Susan has an excellent credit score of 740 or higher, her lifetime cost of that debt would be $159,543. If she has fair credit (in the 620 to 679 range), the cost jumps to $208,578. And if she has poor credit (550 or below), she'll pay an absurd $328,908 in interest. That's more than double what she'd owe if she had great credit — for the exact same house, car, and credit card purchases.
Many lenders are more than happy to loan poor people the money they so desperately need. Unfortunately, they're also quite happy to tack on a very high interest rate in the process.
It's Expensive to Bank Without a Bank
If you live in a low-income neighborhood, you're going to have a harder time finding a reputable bank than the average person. Many big banks shuttered branches in low-income neighborhoods after stricter laws regulating overdraft fees were put into place — which tells you a lot about how banks were making money in these areas. This action paved the way for payday lenders and check cashing facilities to take root in many neighborhoods.
These services are notoriously inefficient ways for consumers to access money, as they charge high fees for cashing checks and absurdly high interest rates on short-term loans. While a 2% fee to cash a check might not seem all that outlandish when it's a one-time transaction, the yearly costs can be substantial for people without a traditional checking account; it amounts to an additional 2% tax on every dollar they earn.
A low-income person making $15,000 a year who uses a check-cashing facility to cash all of his paychecks will pay an additional $286 a year for a service most of us get for free, while additional fees for prepaid debit cards and money orders can push their total fees past $500 over the course of a year. That might be chump change to a wealthy person, but it's a devastating hit when you're struggling to get by.
Compounding this problem is that, for many poor people, using a regular bank isn't an option — even if they had access to one. These people make up the majority of the nearly nine million U.S. households that are "unbanked." Sometimes, this happens because a person can't meet the minimum deposit amounts required to fund an account or to avoid monthly fees, or their employer doesn't offer direct deposit (which is one way to escape those fees). Another pernicious issue is that many poor people work jobs that require long or odd hours. They simply don't have the time to go to banks during business hours, and because they're living paycheck to paycheck, they need their money right away. The fact that some people don't trust banks, and that others aren't financially literate, are two other factors that come into play.
All in all, being unbanked leaves poor people in a grim situation, and the problem is growing.
Goods and Services Cost More
Everyone has to eat, but not everyone has the luxury of cruising over to Costco to take advantage of buying in bulk at low prices. From groceries to toilet paper, poor people typically end up paying more for the very same products, for two reasons.
First, low-income people are more likely to shop at their local corner market, where the prices are much higher than at a big supermarket or wholesaler. Plus, because they don't have the money saved up to buy in bulk, they often have to buy a smaller package — just enough to get them through the week, perhaps — which carries a price premium. Buying in bulk comes with a higher upfront cost but a lower per-unit cost, but most low-income people can't take advantage of that trade-off. Likewise, they may not have enough cash at the ready to stock up during a particularly great sale.
Unfortunately, this is only getting worse. New research out of Harvard shows that "prices are increasing by more than 2% a year on average for goods purchased by consumers with household incomes under $30,000, but by just 1.4% annually for those with incomes above $100,000." That might not seem like a big difference, but it adds up. Over the course of a lifetime, the wealthy could pay thousands of dollars less for the same goods as their low-income counterparts.
Between higher interest rates, expensive banking options, and difficulty buying things on sale or in bulk, it's incredibly tough – and sometimes weirdly expensive – to be a low-income earner in America. While there's no panacea on the horizon, these sobering facts should compel all of us to not only look out for one another, but to do everything in our power to make sure our own finances are in order.
If you're among the 50% of Americans who is one small emergency away from financial freefall, maybe this can be a wake-up call to help you realize just how devastating and difficult life can be as a low-income earner in this country. You can start by improving your credit, so you won't be forced to pay exorbitant interest rates when you need a loan, and starting an emergency fund, however small at first.
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This article was written by Drew Housman from The Simple Dollar and was legally licensed through the NewsCred publisher network.