Being Poor All The Way To The Bank

i-710d005c8660d36282911838843a792d-ClockWeb logo2.JPGOn poverty, personal, national and global, and why it makes sense not to have a bank account when you are poor (October 04, 2005). Espcially in light of recent news about the way big banks rip off people by depositing big checks first - placing accounts into the red - then depositing multiple small checks which otherwise would have cleared but now incur fees which, added over many customers, add up to billions in profit for the banks. This practice kills me every month. I pay the biggest things (rent) by MoneyOrder so I am not afraid of that bouncing, but I'd like to minimize the number of penalty fees I get hit with. Can anyone tell me more about the Harrington Bank since I want to leave Wachovia?

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In a recent speach about the response to the Katrina disaster, John Edwards, among else, said this:

Second, folks need a chance to save for the future. The CCC sent money home to families. FEMA actually had a good idea with these debit cards. But now they're doing direct deposits in bank accounts. The problem is, many people displaced by the storm lived in neighborhoods without banks.

A worker making $12,000 a year could spend $500 just cashing checks and buying money orders to pay the bills. David Shipler begins his book about poverty by saying "it's expensive to be poor," and he's right. So as we offer relief, we should help people open bank accounts so they can escape the check-cashers and save. So they can get ahead - not just get by.

Some conservative commentators have commented on this, displaying their out-of-touchness (I will not say ignorance and arrogance) by voicing surprise that people do not have bank accounts. I will now briefly explain why not having a bank account is a rational choice if you are poor.

If you are not poor, your bank balance looks somewhat like this (X-axis is time, Y-axis is amount of money in the account):

i-a7f73e84203f91e06affc08d448fce43-a2 Bank - rich2.jpg

Once a month (or so) your paycheck gets deposited in the bank. Over the period of a month, you gradually spend most, but not all of the money. Something remains in the bank account. That difference between income and spending accumulates over time and gathers interest. It is obviusly a good idea to keep that money in the bank, or to move it to a different account (e.g., savings, retirement) or invest in the stock market.

Let's, for the argument's sake, assume that you do not start off as poor, but as middle class. You have a bank account and the balance looks like the one above. But, as economy is slouching, your expenses start matching your income. Gas prices go up. You salary does not. You incur additional expenses, e.g, you have a baby, or your car is getting older and needs frequent repairs, or your health insurance premiums go up, or the taxes on your house double. As a result, you spend all of your pay-check every month - nothing remains.

Your balance approaches zero at the end of each month. Then a disaster strikes: you have a huge medical bill to pay, or the car repairs cost you several hundred bucks, or someone dies and you have to pay for the funeral, or you loose your job and it takes you a couple of weeks to find a new one that does not pay as much as the old one. Your balance will start looking like this (the arrow showing the time of the disastrous event):

i-c0baea49dc161bd9042e1014e618d101-a2 Bank - poor2.jpg

Every month you are faced with a choice, really a false choice: do you worry about your credit rating, or do you pay your bills and feed your kids. To hell with the credit standing - your primary duty is to survive, keep the roof over your head and feed your kids. Every month, you get into the minus. Month after month you dip deeper and deeper into the red.

What happens then? The interest rate is pretty small. At the end of the year you may accrue a dozen bucks total. On the other hand, every time you write a check that puts you into the minus, your bank automatically charges you a dozen bucks. You get smart: pay all the little bills first and leave the biggest bill (e.g. rent) for the end, getting into the minus only once a month, thus avoiding paying multiple penalties.

Let's look at this from a different angle. Whenever your balance is positive you accrue interest. The bank holds your money and pays you for that privilege. In a sense, the interest rate is the penalty the bank pays you for owing you money. But when the situation is reversed and you owe the bank money, you do not pay exactly the same penalty rate. Instead, you pay exorbitant amounts of money that put you even deeper in debt.

All the money that a bank has belongs to someone else. The bank invests that money and uses it for a lot of good and important stuff (on top of paying their employees, building and equipping new branches, and advertising). Without the banking industry, the economy would not be able to operate very smoothly.

Yet, the banking system is not designed to be fair, nor is it good for poor people. When you open an account you are asked to sign on the dotted line - you have no say in the crafting of the contract. It's YOUR MONEY, after all, that the bank will be using, so it is YOU who should have a bigger say in how the contract is worded and how penalty rates are calculated when one party owes the other.

So, what do you do if you get into the situation depicted in the second figure above (or if you are poor to begin with)? Get out of the bank! Close the account before the bank closes it for you. Or keep the account but do NOT deposit your money in it. Keep the cash. Spread it along the month as wisely as you can. Pay everything with cash. If you cannot (and I am assuming it is illegal to refuse cash - the legal tender in the US - though many organizations do), exchange the cash for a money order. Quit using checks. Keep only one small credit card - completely empty - for emergences. Not just that you have a better control of your finances and a better feel, day-by-day, about your financial state, but you also avoid paying penalties for going in the red.

All of this I am telling you from personal experience. The picture number Two is how our bank account looked for quite a while. We keep a checking account in one bank, but do not use checks - debit card only. I check the balance almost every day. We also have a savings account. Whenever some money comes in I put a piece of it in the savings account. By the end of the month, there is usually sufficient money there to pay the rent, which I do using a money order.

We have one credit card which is tiny - only $400 credit limit. We use it occasionally and try to clean it up every month because this improves our credit rating. For 14 years we had two cars - needed for two people, two jobs, two kids to take to two schools. Now we have one car and on some days have logistical nightmares with driving schedules. Sooner or later we will have to get a new car, but I will not be able to afford to buy a car that I can afford to drive with current gas prices (hmmm, first Priuses are 5 years old now - perhaps they are getting within reach).

My mother sends some money all the way from Yugoslavia sometimes when I am in a financial crunch. My mother-in-law sometimes pays some of our bills, or buys us a lot of groceries, or buys kids' clothes. We are poor, but we manage every month to survive somehow, using magic for most part. One of the key aspects of it is to have as little to do with banks as possible. Bank will come and get you and bleed you to death if you do not know what you are doing. It is a rational economic choice for a poor person not to have a bank account at all.

I owe my school almost $800 dollars in tuition for the last year. I was planning to pay it once my defense date is set. However, a couple of days ago, I lost my school e-mail account (which only means I'll loose departmental information - no big deal), but more importantly I lost online access to the library, something I need for my Dissertation writing. I need to download papers. I have no idea how to find such an enormous amount of money. I guess I can negotiate a payment plan, but even that would be a couple of hundred per month that I do not know where it will come from.

While writing my thesis takes time and energy, and teaching does not really take much time (and does not pay much, either), I would not mind an additional flex-time job. Anyone in Chapel Hill/Carrboro/Pittsboro/Raleigh area has a job I could do? Waiting tables? Let me know. I would also appreciate a hit on the PayPal button every now and then. Or should I install an Amazon button instead, for those who do not like to use PayPal? Let me know in the comments.

More like this

Check the banks in your area to see if they allow full online banking. With that you get to select the days on which bills are paid. Then you could also use two bank accounts one for deposits and one for payments with you controlling the transfer of funds electronically from the deposit account to the payment account followed by you controlling when the bills are paid.

I don't know if you are able to do this as I am in Canada and online banking is a much bigger deal here. I've heard good things in the past from American friends about the online services offered by Wells Fargo bank so check them out too.

Anymore, credit unions are (in my experience) not a lot different from banks. But yes, do have two separate accounts. And try not to write checks for anything you can use cash for. Especially avoid writing checks for little individual purchases. Oh, and never have two accounts, of any kind (including credit card), with the same bank.

We have one account into which one of our incomes deposits directly, and from which a number of bills are paid automatically. If you can do this, it's great, because it means several bills which you don't have to worry about, and which will never overdraw your regular account.

Yes, there are folks who will refuse to accept cash. I really wish someone would take this on -- "legal tender for all debts, public and private" should mean something, after all.

I read your site all the time, and believe me, I'd send money if I could, but I have none to spare. And I closed my paypal account because it got hacked repeatedly.

Oh, one more thing, no, two: first, communicate early and often with the people and institutions to whom you owe money. If they know your situation and that you are dealing with it in some rational way, they will often offer you some kind of relief themselves. Second, don't worry about your credit rating. We are trying to refinance our house (due to a catastrophic event) and we find that we have very excellent credit (not helping so much, because the house is oooold and has idiosyncratic features). This is interesting, because we are only a year or two downstream from a major financial meltdown. These things just correct themselves with time. In fact, time is the only way to correct them, as you'll find out if you ever try to correct misinformation. Plus, if you just don't worry about the credit rating, it frees you to say "Ha ha, do your worst, honey. My credit rating is already critically dead." to those phone trolls who call from collection agencies. But -- if you talk to the creditors direct, there will be no collection agencies calling you anyway.

And consider credit "counseling." I would not recommend community credit counseling organizations. I won't go into why not here (but you can e-mail me). However, I can recommend Lighthouse Credit Foundation (they are online at www.lighthousecredit.org. Some advantages are: reduced payments and reduced interest rates in many cases, and at Lighthouse, the choice of which debts to put on the payment list is yours, not theirs.

I've always found that buying an old car for a couple of thousand dollars, and fixing it up to meet my standards, is much the most economical way to have wheels. I doubt that I'll ever be able to afford a hybrid; the price simply won't come down that much. Besides, I hate modern cars in general. That said, I've known people who bought new cars regularly, and moreover made the purchases ease their financial situation. I think the technique had to do with buying at the end of the model year, and I think you have to have good credit, although not necessarily much money.

As to auxiliary sources of income, I'd love to know of any that actually work, but I don't.

This post is several months old, though the situation has not changed much. We have cleaned up our old credit card debt, we have a savings account in a credit union and a checking account in Wachovia. We never use checks - just the debit card, moey orders and cash. I am still looking to hear about Harrington as I'd like to leave Wachovia for a variety of reasons.

As I recall Chapel Hill has both the State Employees Credit Union and Orange Savings and Loan, and may have another possibility or two.

By Christopher Gwyn (not verified) on 24 Nov 2006 #permalink

First things first: are you going to send that to Help Us Help Ourselves? Both your post and Older's comment contain useful information for the carnival's target audience.

On the other hand, I'm not sure it's even possible to close your bank account when there's a disastrous event. If you have enough money to pay your bills in cash, you usually also have enough to pay them with a bank account. Citibank waives my banking fee because it's a student account, but the official statements keep saying the fee is a flat $3/month.

I have found that not using a bank is the easiest, safest way for me to manage. I found out about pre-pay "credit" cards that allow you to pay for things with "cash" and improve your credit at the same time. It costs me $5 a month for the service fee and 1% or $5, whichever is lower, to deposit checks into the sureity account. It is a Visa that won't allow me to spend more than I have in surety.

To be clear, this is about ideal for me. I have absolutely atrocious credit, mostly due to medical expenses and I live below the poverty line. I really need to lean up my credit, I want to upgrade my contractors license to full builder (I am licensed for handywork only). That would allow me to really build the business I want - high-end remodeling/building. To get the upgrade license, I need a much better rating and to get the insurance coverage, I need a fairly substantial credit line - whether it gets used or not.

Banks cost about the same as what I am doing now, often times more, but they do nothing to build my credit.

Many places (like Verizon) will charge a "convience fee" for using cash. Places, like the heat, will not accept it at all.

a 25 cent overdraft triggered 10 bounced checks at $33 a pop..we quit banks for awhile but fees to cash checks are high..
..We now have a savings account with direct deposit..we withdraw what we need for rent and utilities. We use a money order for the rent and pay our utilites for $1 at the grocery store..we withdraw what we need for a week...we are usually under $30 then the monthly direct deposit..

...this has worked for about a year..

By nogo postal (not verified) on 02 Dec 2006 #permalink