Gary RivlinBack to OpinionGary Rivlin

America’s poverty tax

Photo: Flickr/Ross Griff

It’s expensive being poor, the writer James Baldwin famously said.

And Baldwin uttered those words 50 years ago, long before the working poor became Big Business – long before the invention of the payday loan, rent-to-own, and a long list of diabolically clever ideas that entrepreneurs have devised to get hundreds-of-millions-of-dollars rich off those with thin wallets.

Call it a poverty tax. It’s the hundreds of dollars, if not thousands, in extra fees people making $20,000 or $25,000 or $30,000 a year pay because they have lousy credit or because they have no savings.

Add up all the profits pocketed by all those payday lenders, check cashers, subprime auto lenders, and other Poverty, Inc. enterprises and divide it by the 40 million households the Federal Reserve says survive on $30,000 a year or less. That works out to around $2,500 per household, or a poverty tax of around 10 percent.

The corner check casher takes the biggest bite, at least from those 15 million or so Americans who have no bank account—the so-called ‘unbanked.’ In the main, these are people who’ve bounced too many checks or otherwise messed up their relationship with a bank.

How much does the average check cashing customer fork over? According to Matt Fellowes, who investigated the high price of being poor as a researcher with the Brookings Institution, the typical unbanked worker bringing home $22,000 a year spends roughly $800 to $900 a year in check-cashing fees. That figure tops $1,000 annually when you include the fees the unbanked pay for money orders and the additional fees check cashers charge (around $2 a check) when you need to pay your bills.


The payday lender – those in the business of making horrifically expensive loans against a person’s next paycheck, her social security check, or, increasingly, an unemployment check – takes another big cut of the meager earnings of the working poor. The single mom struggling to get by on $20,000 a year is forever falling a few bucks short before payday but that’s the brilliance of the payday industry, which dates back to the early 1990s. In less than ten minutes, she’ll have a few hundred dollars cash in her hands, no questions asked—and then be charged a fee that works out to an annual interest rate of 400 percent.

The average payday customer pays between $600 and $700 a year in fees. More than ten million people avail themselves of a payday lender each year.

The rent-to-own industry draws less than half that many customers but generates around the same revenues as the payday business. The genius of rent-to-own is that its proprietors have figured out how to collect $1,400 in weekly installments on the same child’s bedroom set you could pick up for $600 with a credit card. Can’t afford a computer for the kids? No problem. The corner rent-to-own store also carries laptops and PCs, along with flat-screens, washers-driers, and living room sets.

The rent-to-own customer, of course, could choose to set aside some money each week until she has saved enough to buy the item in a retail store. She could frequent a secondhand shop. But for essentials there’s the risk of being dubbed a negligent parent by the authorities or family and can you blame the security guard making $25,000 a year or home health aide bringing in $15,000 annually for wanting to come home to a comfortable easy chair and a large flat-screen TV? The point is that the rent-to-own customer is typically paying two and a half times as much as those who have the means to buy retail.

The average rent-to-own customer spends around $1,200 a year. That means the typical rent-to-own customer pays an extra $700 annually because he or she doesn’t have the cash or credit to buy it at a store.

Those living on the bottom of the economic pyramid pay more in a wide array of other ways. The subprime insurance market is its own racket and even mainstream insurers charge more for auto insurance if you live in an unsafe neighborhood where robberies are more common. Select credit card companies still cater to those with a subprime credit score of less than 620 – but you’ll pay dearly for the privilege of carrying that plastic in your pocket. For instance, there’s First Premier, which charges a $95 application fee and both a $45 annual fee and a $6.25 “monthly servicing fee” for a card carrying an APR of 36 percent, which at least is better than the 49.9 percent card they were peddling last year.

And then there’s the steep cost of financing your car if you’re one of the 50 million or so Americans suffering from a subprime credit score. Rather than a car loan carrying an annual interest rate of around 5 percent, the subprime customer pays interest rates of 18 or 20 or 25 percent a year, if not more.

The person paying 20 percent interest on a $10,000 car loan will pay $900 more each year on a 5-year loan compared to the person paying an interest rate of 5 percent on that same loan amount.

Thankfully, a good portion of the working poor never resort to a payday loan. They avoid paying the steep rates charged by the local Rent-A-Center. Plenty of people earning less than $30,000 a year have a checking account and good credit. There’s also help on the horizon as the new Consumer Financial Protection Board has singled out payday loans and subprime auto finance as two of its top priorities.

Yet don’t underestimate the ingenuity or hunger for profits driving those who the author Mike Hudson dubbed “merchants of misery.” A few years back, I attended the annual Check Cashers Convention, where I sat in on a 90-minute presentation dubbed, “Effective Marketing Strategies to Dominate Your Market.” Speaking to a standing-room only crowd, a consultant named Jim Higgins shared his tips for turning the $1,000-a-year check cashing or payday customer into one worth “$2,000 to $4,000 a year.” Pens scribbled furiously as he tossed out ideas. Raffle off an iPod. Consider Scratch ‘n Win contests. Institute the kind of customer reward programs that has worked so well for the airlines. And for those who are only semi-regulars offer a “cash 3, get 1 free” deal. After all, Higgins told the crowd, “These are people not used to getting anything free. These are people not used to getting anything, really.”

Gary Rivlin, the co-editor of the Economic Hardship Reporting Project, is the author of five books, including “Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business.” He has worked as a staff reporter for The New York Times, the Chicago Reader; and the East Bay Express.

 

Comments

  • Yessika

    And let’s not forget that many banks (Citibank, for example) charge higher monthly “service fees” on checking accounts with lower balances.

  • Stormrider_52

       I make less than $50,000 per year which averages to a take-home pay of $27,000.  I own my own home (& mortgage), drive a 14year old car, and eat well.  I pay my bills without a payday loan because I practice sustainable living.  This is not a fad or buzzword of the time.  It is what my parents, grandpaarents, great grandparents, etc. did.  We don’t purchase what we can’t afford. Americans today seem to thinkthey are entitled to cable, cell phones, computer games, soda, potato chips, lottery tickets, pot, liquor, etc.  The solution is not outlawing or legislating these businesses.  WE ARE NOT VICTIMS, WE ARE THE PERPETRATORS OF THIS MADNESS.  To put them out of business, everyone from the lowest wage earner (and yes Virginia, we had them in the 50′s and 60′s) to the ferderal government will have to live within their means.  If we are to survive as a society we have to start thinking for ourselves.  Screw thie liberal self-rigeousness.  I, as a life-long private sector wage earner, am sick of supporting those who WON’T work.    

  • Sam

    Great show..

    Watch this movie, the control of the super rich is keeping us as a human race from thriving… I think the solution starts with removing the federal reserve….

    it is a key reason we are in the problem we are in and not thriving. very though provoking movie

    http://www.thrivemovement.com/the_movie?userToken=33368562m455ec. 

  • Abuelo

    Thanks for the article.  I’ll take a look at your book.

    Many years ago it was easier for poor people to live within their means.  They lived from hand to mouth, without creative options for adding to the drains upon their wallet.  What you are describing is making a business out of getting first in line at the payment window with folks who can’t afford the product, but the sales job entices them to pay 10 cents a slice for a 20 slice loaf of bread that they could have bought for a dollar.  The net result is a reduced standard of living, with the extra money going to ingenious financial products that deceive the buyer.

    I hope you are correct, and that the new Consumer Protection Agency will find ways to correct these traps for the unwary.

  • Tillyerkt

    The “hidden” tax is the devaluation of the dollar as a result of uncontrolled government spending.  This hidden tax hits those on fixed income since their life’s savings becomes less valuable.  When President Obama wants to “only” tax those earning over $200k he fails to recognize that the poverty level will soon become over $200k!  The President is using bate and switch strategy!

  • http://www.facebook.com/people/Kevin-Faber/571268107 Kevin Faber

    There’s another one: the bank fees on accounts that don’t maintain a minimum balance, so the people with the least money, who can least afford the fee, are subsidizing enormous bank profits…

  • Moribund Cadaver

    While it is true that many Americans “do not live within their means”, you have bought into the propaganda that everyone who is poor and suffering deserves it because they’re just lazy, bad people.

    That canard is wearing thinner and thinner, especially in these times. The staw man of the ‘lazy poor’ is teetering. There are plenty of working poor in economically horrible regions who cannot have a home, raise a family, or own a car without being exploited. It’s that simple. There are no ‘means’ to live within for them that have not been co-opted by predators of the poor.

    Does the poor person still have to work hard to escape poverty? Of course. But it’s unethical to allow that person to be preyed upon every moment while they are trying to do so, tipping the playing field in the direction of those who benefit from a large percentage of the nation remaining in abject poverty and being manipulated into feeding the machine.

  • Moribund Cadaver

    This industry is a result, in part, of the great american belief system about the immorality of being poor. The poor are people who don’t deserve sympathy, for in America one’s income level denotes how ‘moral’ one is. (That is why those with the most money feel it is their right to manipulate and abuse everyone below them – they are the arbiters of what is right and wrong, what is acceptable behavior.)

    It all leads to an attitude of exploitism, where one’s fellow citizen is seen as a target to trick into giving you something. He who swindles a dollar, proves his worth. This is at least the philosophy of the sociopathic type of person who quickly rose in American capitalism, while the non-sociopathic personality types were fed a line of baloney about their duty to endure indignity and suffering with stoicism.

  • Agoodbrain

    I don’t agree with much of this article so I didn’t read most of it. Were figures included that showed most making $20k or less use check cashing, payday loan, or any other of these scam services? I have made that kind of income for years and never used any of these and believe many see them for exactly the scam they are. Unfortunately the poor and dumb will always be with us and will be preyed upon by these vultures. Here’s another good one: (as far as I know it was started a few years ago and still practiced) apartment owners are charging prospective tenants an application fee of $10.or more. Only one applicant will get the apartment yet they all lose the fee. How in the World does anyone allow this?!!  But, I got to think many of them should have used their head and not allowed their bank account to get overdrawn. Many credit unions are open to all and I definitely suspect many just have a friend cash their check or someone at the corner store they’ve known for years cash their check. Anyway I’ve seen for myself, its a cruel World living in the USA for many.

  • http://profile.yahoo.com/S2L5WQJ4QZWJPGMXWUXWDAOMWM SHERI

    Don’t forget that the size of the kitchen/pantry/storage space is proportional to the money you make, so the poor generally have no space to store when they buy in bulk, so they can’t take advantage of that method of saving money.  They don’t have space for an extra fridge or freezer, so they can’t store perishables bought on sale.  They are disproportionately “dinged” when trying to LICENSE or INSURE that clunker car to get to work that may not pay a “liveable” wage, and the costs of “protecting the environment” have been passed on to the poor disproportionately through vehicle emissions laws, while large corporations spew WAAAAY more toxins and pollutants into the air and have managed to keep the US from signing on to Kyoto, as our “poor” beleagured “overly regulated” corporations cannot possibly be expected to pay for spoiling our environment.  Also, the poor are disproportionately HOUSED near those toxin-spewing corporations, and their health disproportionately RUINED–which immiserates ALL of us even more, as we struggle to provide health care to all people.  And we treat people who have been impoverished by the cut-throat “good business practices” with ABSOLUTE DISRESPECT–as if the physical and financial hardships they bear were their own “fault.” We forget all those college kids unable to pay back their student loans (with interest charged at usurious rates) paid for their own “job training” with money they expected from jobs they would get as a reward for spending their time, minds and futures–and now there are no jobs for them, so they end up taking low-pay service jobs and hassled by student loan servicers.

  • savaskys

     I agree…Join a credit union and get your paycheck
    direct deposited, 

  • Randall Johnson

    Payday loans are a rip off, but people need to consider that if they were all put out of business many poor people would have NOWHERE to go for a necessary loan.

  • Ben

    The costs for these services are unreasonable – when organized crime charges them they were considered unlawful – and I suspect those who use these services often have no alternatives. However I also believe that often people are seeking immediate gratification of their desires and are not willing to wait to acquire things in a more patient and sensible manner – along with their ignorance as to the extent of the additional costs that they are indeed incurring.  Two actions can help - increased consumer education and money management skills and regulation of the activities of these service providers.

  • http://www.facebook.com/mastersargentofaces John Sargent

    I have to slightly poke some holes in this opinion. You clearly point out that these businesses are targeting this group of people and this is true. However I have to point out that they are not the problem. It is the individuals. I do not see any of these businesses holding a gun to these people’s head to take the peoples money. This should not be a case of demonizing the companies, This should be a case of education of “Spending” what you have and thinking with your wallet and logic. Not the idea you need “New” furniture, electronics or a car. Many of the same people that use these systems are trying to falsely inflate their ego by looking better than what they have. The sad fact we are living beyond our means, Cut up those credit cards, QUIT spending money you do not have and LEARN to find alternatives to costly replacements and repairs to items like your vehicles and electronics and computers, There is no shortage of second hand shops or other community chests to ease the pain to your pocket books. I challenge ANY one to show me a case where the person had ZERO choice in using these services. There are options and problem solving that can be done. I learned from my Grandfather “Poor people have Poor ways” and it’s true, the problem today is many individuals in the lower income brackets are trying to live a life outside of the income. An example given out by our current leadership. THIS kind of thinking is DANGEROUS and should be stopped.

  • http://www.facebook.com/treeweezel Paul Blichmann

    I always called lottery tickets, cigarettes, single serving junk food, and booze “The Poverty Tax”. Gasoline also, if you think about it. (bad cars in bad shape, bad driving and bad trip planning)

    Maybe guns will become part of the Poverty Tax if their sale, license, and bullets are adequately taxed.

  • John Sargent

    This piece has been here for a while now and I want to point out some very basic issues with some of the other comments here. People seem to think that There aren’t alternatives and that there is “Exploitation” of the poor.

    With that said, I want to point out that those of you that are commenting on here have a “Point” however I also would like to point out that there are things that “Target” individuals on issues like Owning an older car or Passing EPA inspections an the like, I offer this tidbit to you.

    First off, How many of these individuals “Chose” to make Choices that lead to this lifestyle? How many have put themselves into this mess? Many of the services listed above are just examples of “inflated living”.

    While I agree with one comment that “They don’t have a place to stock up on bulk” when it comes to food, OR another comment in relation to Renting a house and the fees associated with them, I have to point out that not every Landlord or Apartment manager does this, ADDITIONALLY, I have to ask, WHY and HOW is it that We can’t take a page out of the old book and “Work together” as a unit to better our own lives? Why are we working against each other? When you consider how many people actually sit down with the family and friends to work on ideas to help each other save money in a joint effort the conversation never happens?

  • John Sargent

    Everything you have listed is a “Choice” Even gasoline including firearms (Even though Firearms and ammo WOULD provide food and protection where everything else wouldn’t). While I am sure you challenge this idea I want to point out that Carpooling (Even if you don’t hug a tree) is Financially sound, As for lottery, Cigarettes, and Single serving Junk food and alcohol Those are as much a “Choice” as anything else. As for Firearms and ammo Those are “TOOLS” just as much as a hammer and Wrench is. The real poverty tax is in the “HUNTING and fishing licenses” As I feel that There should be some exemption to fishing and hunting fees IF you are trying to put food on the table.

    This is just an observation and my personal opinion.

  • John Sargent

    As a side note, I am poor and practice what I preach, I said it, I meant it, and I represent it. I’m poor and live within my means. it’s not a difficult concept to grasp.

  • John Sargent

    Czydiamond, While I understand what you are saying that is NOT a true statement, First off, For what you are implying is the idea that getting a loan should be “Easy” I have to disagree. Many payday loans wouldn’t cover many emergency expenses.

    I offer to you some alternatives to “Expensive” costs. First LEARN. Learn to turn a wrench and fix your own vehicle, DO your own home maintenance, And learn basic plumbing and electrical.

    Imagination and self reliance is dead, We have shirked our responsibilities and allowed others to do the jobs for us. Unfortunately there is a HEAVY price for that practice. While Time is money, Your time and your knowledge is worth more TO YOU than anyone else. Use it wisely learn to minimize expenses and SAVE the difference. These small issues are a major part of why the poor will always be downtrodden.

  • John Sargent

    Another misguided yet well meaning point… I ask you of the companies that spew that “Toxin” in the air, who pays for it? I want people to understand the power they have in their control, Being poor does NOT mean being powerless. IF you find you can’t afford nice things, then Shouldn’t We be working to make the few things we have as nice as we can by the sweat of our own brow?

    Now, With that said, it is our fault. WE voted, people and society in general have made the rules. so yes we are to blame.

    As for college? While I applaud that they wanted to further their education, and such, I have to ask, Why? No offense but WAY too much value is placed on a college education.

    Additionally there have been and always will be a divergence of opinion when it comes to education.

    Here’s a simple fact for you, EVERYTHING you do in life is based roughly on a 6th grade education. Employment is by and large Just a focus of “Skills” for specific areas of life that Have little to ZERO bearing to REAL life advancements outside of employment.

    With that said. if you want to fix the educational system you have to work at the bottom and then deal with colleges.

    First Basic education NEEDS to include at the MINIMUM Reading comprehension, writing and basic communications skills. Math, U.S. History, and the constitution and the Amendments that go with it, and Basic U.S. Law as well as accounting.

    This should be covered from kindergarten up to the 8th grade. At which point It needs to be set in a G.E.D. type fashion with zero personal bias of the teachers or administrators. and a certificate of Basic completion is awarded. From the 9th grade ON a test BASED on the ASVAB Will be covered, And an individuals abilities and weaknesses will be assessed. And the next 4 years will be focused on achieving basic Skills that will be used both in personal life but also in employment. Along side those they will be tasked with exploring their interests in various fields and can work to cultivate those goals.

    While You might ask “Where is sports, Music, and Extracurricular” activities I offer this, That is something the PARENTS will have to sort out ON their own and in a group. while I am all for Talent and Sports, I feel the expense should NOT rest on the backs of “All the tax payers” You can argue statistics and how they influence learning, but I for one see LITTLE incentive at this point to include it in the basic goal of education.

    Because the number of individuals that ACTUALLY Get into Music or sports or any other “Field” of entertainment are VERY limited. IF Hollyweird, or the Record companies want to fund it, Awesome. Otherwise the parents need to foot the bill.

  • John Sargent

    While I thank you for your comment on behalf of poor people everywhere, I have to point out, That You can’t exploit choice,

    You and I and generations of people before us voted for it and supported the programs that are today keeping poor people poor.

    With that said, YOU and I have control of how we spend our money for the greater part of our income, I ask you, Who is truly poor? How many people are homeless?

    IF you compare the U.S. with the Rest of the world, How many people are TRULY doing without? How many are truly suffering as badly as many 3rd world nations? Or war stricken parts of the world?

    While we have violence in this nation the odds are still in our favor that we won’t have to see it personally, We don’t have to worry about random death because we have 2 warring factions running around. We don’t have chaos or other issues. And while that is nice what we don’t have is Control of “How we chose to live”

    I would be thrown in jail and branded a criminal if I built a cabin in the mountains. the house would be deemed “Uninhabitable” by societies standards and I would be “Trespassing”.

  • John Sargent

    Kevin “Credit Unions” There is more choice than many think. Investigate it for yourself.

  • John Sargent

    Abuelo, You make a solid point on “Without Creative options” As Many individuals don’t stop to consider places LIKE Salvation army or second handshops. or working together to Get services as a group instead of trying to struggle on their own.

    Many individuals would benefit from “Skill sharing” Like Babysitting for the family down the street in exchange for Repairs to a vehicle, Or Fixing appliances in exchange for a Home cooked meal in stead of top roman.

    These are just simple examples of “Helping each other better our own lives” they are simple and Build true community spirit and Bartering. old and simple ideas that help everyone mutually.

  • John Sargent

    moribund, I have to disagree, You can’t prey on those that allow themselves to be. Problem solving is a dead art, logic and community/Family sharing is dead. no long are people banding together to solve larger issues, or working to make it work for all of them. I ask, how many people have worked to ease the burden of others in exchange for the same? Do you know someone that could HELP you with car repairs? Or home repairs? or just a craftman that could add beauty to your home in exchange for a service or skill YOU have?

    While I agree that There are predetors out there I have to ask, How can YOU help just ONE person?

    I do, I offer to help do repairs on computers of elderly and poor individuals, I help educate them on the risks of Online useage, I help to do basic maintenance of vehicles and do repairs in exchange for other services I can’t do or items that I would personally like to get.. But I’m just one man helping my fellow man and bettering myself in the process.

    Is it such a hard idea to grasp?