Why you should cover poverty and financial services in your county:
- Everyone needs access to financial services to survive in society. The poor often cannot access these services due to high costs, inconvenience and complex fee structures. If the poor pay higher costs for financial services because they are cut off from the mainstream, less money is spent on goods and services in the community. The domino effect continues from there. The poor have less money to save, which means less money to stabilize the household situation, which means less money to put into the banking system, which, finally, could result in less capital available for lending and investments for the bank.
As a result of higher financial fees, all resources become scarcer in a poor household. This leads to a constant state of crisis. High stress levels have a poor effect on health. Bad health means missed days at work or school and a lack of time available for long term planning. Financial stress has also been linked to less worker productivity and harmful to a company’s bottom line.
Alternative financial services such as payday lending rarely build a person’s credit history. Personal credit histories determine the ability to purchase an automobile or home. If members of a community can afford real assets – such as housing and investment land-then the area economy and broader markets benefit.
- Financial services provided to the poor are often abusive and considerably more expensive than services provided to individuals not living in poverty. The Georgia legislature effectively stopped payday lending in 2004 by capping annual percentage rates (APR) at 60 percent for a loan. In addition to mile-high interest, payday lending fees usually are debilitating, such as $16 for every $100 borrowed to be paid back after a two-week period. The high rates create debt traps difficult to escape from. Despite these abusive practices, consumers demand such loan types. These loans are small, easy to obtain and require only a bank account and a job.
Some poor individuals may rely on a bank’s courtesy overdraft protection as a loan. Some banks automatically pay between $100 and $1,000 in overdraft coverage for a fee. The average fee costs $29. Some banks charge daily fees as along as the account has a negative balance. The end result still is tremendous debt not unlike a one-time payday loan for $200. If the overdrafts continue, the bank will most likely close the account and report the individual to Chex Systems. This makes obtaining a future checking account very difficult for the person. Title loan companies, pawn shops and rent-to-own business also charge high interest rates and engage in aggressive marketing.
- Poor financial decisions made by low- and moderate-income households are similar to the poor financial decisions made by middle- and upper-income households. The key difference is that middle- and upper-income households have sufficient income and wealth to cover up their mistakes. Low- and moderate-income households are exposed by these mistakes because they don’t have enough money to make up the loss.
- Expensive financial services for the poor drain resources from the local community and deplete money available in the local economy. Yet check cashing services may not go away soon. Approximately $200 billion is paid to workers each year who do not have a bank account. The workers then cash the check through a service that charges an average of 2 percent of the check’s face value. This translates to nearly $4 billion spent on cashing fees that could be spent on local goods and services. Check cashing services have proliferated in the absence of cost-effective services offered by mainstream banks to individuals. Some states – such as Oregon – have begun to regulate check cashing businesses.
- Unexpected medical costs can debilitate a low – or moderate – income household. Employee benefits programs exist that are woefully underutilized. Programs such as Flexible Spending Accounts are offered by many employers. This benefit plan allows employees to set aside money before taxes to pay for medical and childcare expenses. By setting this money aside through their employers, employees create virtual savings accounts that can be used to pay for emergencies, doctor visits and prescriptions.
- Families in poverty often turn to friends and family to borrow funds. If no resources area available to borrow, the poor may try alternative financial services firms, or mainstream lenders. An unspoken rule of poverty: If someone you know asks for money, and you have it, then you are obliged to give it. This pattern creates a constant trade of money and provides little opportunity to increase savings and get ahead.
- Welfare reforms have significant influences on households’ ability and willingness to save money in mainstream financial institutions. Recent research has found that relaxed credit limits on countable assets – such as savings accounts and CDs – and vehicle equity have led to increased savings and checking account balances by single female-headed households. State welfare policies have a significant effect on the savings decisions of welfare recipients.
- Many low income households use the U.S. Federal Income Tax system as a method of forced savings. By eliminating withholdings during the year and requesting the Advanced Earned Income Tax Credit from employers, then the large tax refund windfall could be spread throughout the year. This would alleviate strain on the month-by-month income. Few individuals choose this option. Instead, many prefer the forced savings plan created through income tax withholdings and tax refunds.
Another form of forced savings is cash-value life insurance. These policies can be very abusive and are never appropriate for individuals living in poverty. Term life insurance, or group term life, provides much more protection for dependents in the event of the breadwinner’s death than cash value policies provide. These policies also cost a fraction of the cash-value price.
- Another financial service marketed heavily toward low- and moderate-income households are refund anticipation loans. These loans may carry very high Annual Percentage Rates (APR). Some individuals do not want to wait eight to 16 days to receive their tax refund. They choose to visit tax return preparers who offer to advance the money immediately after fees and other expenses. An alternative to tax preparation fees is the Volunteer Income Tax Assistance (VITA) program sponsored by the Internal Revenue Service. VITA sites are located throughout the state of Georgia, and locations can be found by calling the IRS at 1-800-829-1040.
- Citizens should be aware of changes in federal tax policies such as different refundable tax credits. Billions in refundable tax credits go unclaimed every year in Georgia. Raising awareness of refundable tax credits is an important public service journalists can provide. Refundable tax credits create a tax refund for an individual. A person can receive this money even if no taxes were withheld during the year and he or she does not owe any federal income taxes. The two most common federal refundable tax credits are the Earned Income Credit (EIC) and the Child Tax Credit. Both of these credits are maximized with earned income. Someone working full-time for $8 to $10 per hour with a qualifying child younger than 17 years old will generally maximize the benefits of these two credits. The EIC can result in refundable tax credits of up to approximately $4,000 for households with two or more qualifying children. The refundable Child Tax Credit provides a maximum $1,000 per qualifying child.
Some low income households do not file their tax return due to anxiety about owing money or lack of education on the process. Every low income household should file a tax return-especially those with dependent children. In addition, households who have not filed a tax return in past years may still file late returns for those prior years (up to 3 years prior in some instances) and claim the refunds.
- Identity theft still strikes the poor and individuals who are familiar with one another.
The most basic methods of identity theft threaten local communities. One of the most frequently utilized methods is to steal a wallet or purse and use the stolen credit cards, ID, or create accounts in the victim’s name using his or her personal information. Criminals also obtain numbers and IDs by sifting through trash for personal information. Citizens should be encouraged to use precautionary measures to prevent ID theft.
How to measure the opportunity to cover poverty and financial services in your county:
Answer these ten questions:
- How many people live in poverty in your county?
- Compare the number of payday lender storefronts, title loan stores, pawn shops, check cashing stores, and other alternative financial services companies with the number of banks, credit unions, and savings and loan companies in your community.
- How many advertisements do you see trumpeting “rapid-refund” loans or “refund anticipation loans” during income tax-filing season?
- Compare the average cost to cash a check at a check cashing store to a local bank or credit union.
- Where do alternative financial service firms concentrate geographically your community?
- Do check cashing services cost more in the local community compared to the same services in a larger towns nearby?
- Where are Volunteer Income Tax Preparation sites in your local community?
- How many people are denied opening accounts because the have been listed in Chex Systems?
- What amount of refundable tax credits were not claimed last year in your county? (Check the Atlanta IRS branch for these statistics.)
- How many instances of identity theft have been reported to the local law enforcement authorities in the past year? Who committed the crimes? Whose identities were stolen? How much money was involved in the crimes?
A step-by-step approach to finding and reporting important and engaging stories
Look at your answers to the questions above. Which topic (or topics) offers the most opportunity to cover poverty and financial services in your county? Pick one for this step-by-step approach to finding and reporting important, engaging stories.
As with any story, you’ll need to:
- Consult secondary sources
- Locate key documents
- Mine key sources of data
- Interview sources
- Observe the story in play
Let’s take, as an example, the topic of unclaimed refundable tax credits. What steps might you take to find and report a story about how much federal money was left unclaimed in your county because low-income households did not file their tax returns?
Go to the IRS Web site and review the rules associate with claiming the Earned Income Credit and Refundable Child Tax credit.
Conduct an Internet search for additional information on how the credits help individuals, families and communities.
Contact Lucy Atkins, 404-338-8562, in the regional offices of the IRS in Atlanta.
Get the estimates prepared by the IRS for your local region, county, or community that are available from the IRS.
Talk with some local county and city officials about the economic stimulus would provide to the local community if it were claimed.
Talk with local residents from poor areas of the community and find out if they file their tax returns and claim these credits. Now you’re ready to write the story.
Here are essential resources that should help you cover poverty and financial services in your county.
Key sources of data
- GeorgiaWatch is a good source of information on the regulation of alternative financial service businesses. http://www.georgiawatch.org/
- The Georgia County Guide provides more than 165,000 facts that cover each of Georgia’s 159 counties. The easy-to-use format profiles the state’s past and present social, economic, and demographic environments. Published by the University of Georgia for 20 years, the guide covers topics such as agriculture, courts, crime, education, health, housing, labor, population and public welfare. www.gafacts.net
- Fighting Back Against Identity Theft is a national resource produced by the Federal Trade Commission to learn about the crime of identity theft. It provides detailed information to help individuals deter, detect and defend against identity theft. http://www.ftc.gov/bcp/edu/microsites/idtheft/