It Costs More to Pay When you are Poor

Adam Rust

It costs more to pay for things when you are poor.

In general, it is more advantageous to pay with a credit card than it is to use a debit card, as the former tends to offer benefits whereas the latter usually offers little or nothing in the way of perks. Moreover, not all credit cards are equal: the best customers get lots of "cashback," miles, and discounted pricing on certain services.

The Chase Sapphire Reserve Card effectively offers one thousand dollars in benefits to new subscribers. In the last quarter, Discover offered a five percent "cashback" reward on all spending at restaurants. It intends to offer five percent at Amazon in the final quarter of 2019.

By contrast, most debit cards offer nothing in the way of perks.

Many prepaid debit cards charge a monthly fee merely to have a card. Among the highest are the popular NetSpend family of cards, where full-time cardholders may pay as much as $9.95 per month to have an account.

Many poor people don’t even have bank accounts, and as a result, they have to pay to each time they move their money through various forms: three percent to turn a check into cash, approximately 1 percent to move cash into a prepaid debit card, and additional funds to move money to vendors electronically.

When the FDIC set out to understand more about who was opting out of the banking system, they found two common features about their finances: 

One) they tended to have below-average incomes.

Two) their incomes tended to ebb and flow. Living with income volatility correlated to being unbanked, even among those persons with average or higher-than-average incomes.

When asked to explain why those chose not to use a bank, the most common reason was “I do not have enough money to keep in an account.”

The problem they face, and the reason that they walk away, is because keeping a low account balance puts a person at risk of getting an overdraft charge. A person could spend a few decades collecting interest on their balance before they recovered the cost of one overdraft fee. Indeed, even when they kept their checkbook balanced, it was still an uphill battle because many banks have established minimum daily balance requirements.

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When you don’t have a bank account, someone wants to take money from your pocket every step of the way. Without a bank account, you don’t have a place to direct deposit your salary. You end up taking your pay over to the check casher to convert it into cash. In my neighborhood, just going from check to cash shaves off three percent of my take-home pay. Ouch.

Then, let’s imagine that I want to buy something online. You need to have digital money to do that. Who wants to buy things online? I do, and so does everyone else. People like buying things online. Each year, a larger and larger share of all of our shopping takes place on the internet. Last year, Americans spent almost $400 billion online – a sum that accounted for nearly 12 percent of all retail sales. 

Unfortunately, you are going to need a bank account to buy something online. To do that, you have to convert your cash into a digital value. You could do that for free with a bank account. If you are unbanked, you pay another fee. You will have to go to a store and buy a “load,” usually for a price of between three and five dollars, to convert cash into a stored value debit card. You’ll have to pay an additional fee for each increment of $500 in value.  

In the end, while you might not need to have a banking account in the traditional sense, you do need something that can access the system that exists for transferring money electronically. Even now, with innovations like Venmo and PayPal available to anyone, there is still a bank involved in online purchasing. You'll pay dearly if you choose to go without a bank account.

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