« The Future? | Main | Interchange Evidence? »

It Is Very Expensive To Be Poor

posted by Pamela Foohey

How BanksCash checking fees, prepaid card fees, money transfer fees, cashier's check fees -- all together, the unbanked pay up to 10% of their income simply to use their own money. And when lower-income people face an emergency, they must turn to expensive payday loans, title loans, and tax refund loans. As Mehrsa Baradaran (University of Georgia) writes in her new book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, "indeed, it is very expensive to be poor."

How did this happen? And how might we begin to solve the problem? In her book, Baradaran details how banks and government are and always have been inextricably tied, with the government helping banks and the banks supposedly helping the public in return. But this "social contract" has eroded. The banking sector has turned away from less profitable markets, leaving people with small sums of money to deposit without a trustworthy place to stash their cash, and people in need of small sums of money to borrow nowhere to turn but fringe lenders. Moreover, these people understandably often are uncomfortable dealing with large banks. And the result is that an astonishing large chunk of the American population is unbanked or underbanked.

If the unbanked and underbanked had a trustworthy place to deposit their cash, some of the fees they pay simply to use their money would go away. This alone might allow families to stay financially afloat. Likewise, if they had the option to borrow small sums of money at reasonable rates, temporary financial emergencies may not set so many families up for a lifetime of financial failure. Which leads Baradaran to a proposal that I’m fond of (indeed, I’ve blogged about Baradaran’s thoughts on it before): postal banking.

The best part of the book is that the proof of postal banking’s potential is in the history that Baradaran sets forth. And the history is an interesting and surprisingly quick read. Not only does it set up her argument for postal banking, but through the history she highlights a very important fact about low-income people who turn to fringe lending. They do so because they have to and are very cognizant of the risks. They are not ignorant, and they also are not poor money managers—or at least no less adept than others. In fact, they likely are more adept. As Baradaran notes, both the poor and middle (and even upper) classes must juggle in their financial lives, “but in comparison, the middle class seems to be juggling with beanbags, and the poor are juggling with knives. Dipped in poison.”

Postal banking, even if the post office system only is used to accept small dollar deposits, may represent the best current option to at least provide lower-income people with gloves to protect themselves while they are juggling. And history tells us that it might strengthen our banking system to boot. If you want to know more about this fascinating history and the full potential of postal banking, pick up a copy of Baradaran's book. And if you want even more convincing, watch her discuss the book here.

Comments

With such a huge percentage of the country living on significantly low incomes, cash can be hard to come by. There are solutions to your cash problem though and Green Leaf Loan Groups is one of them. Regardless of bad credit, you can get cash today: http://goo.gl/B15reh.

Depending on which state you are in, the cost of credit per $100 borrowed will vary from $15-$25. The annual percentage rate is currently around 651.79%.

visit their website for details.

I just finished a book that discussed the same thing! It should NOT be expensive to be poor. How is anyone supposed to get out of a situation like that? I highly recommend "Financial Inclusion at the Bottom of the Pyramid" by authors Carol Realini and Karl Mehta (http://www.openfininc.org/ <---- (they have a great financial blog too). It focuses on the very serious issue of financial inclusion and exclusion throughout the world (especially here in the US). There are so many people who do not have access or choose to avoid banking services. While the wealthy take financial security and banking services for granted, there are billions of people who struggle. This book explains why this is happening and what we can do to help! You don't have to be a leader or professional in the financial service market to make a difference. I finished this book feeling very well versed on the subject and motivated to help. I hope you will check it out

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad