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Getting Rich off the Working Poor


There’s money to be made on America’s working poor, and some U.S. companies are seizing the chance, according to a new BusinessWeek article.

The article offers an in-depth look at how businesses tap into the weaknesses of the working poor–they want goods and services, but aren’t educated about the best way to get them. Several eye-opening vignettes demonstrate the truly dire straits of some working poor.

According to the story:

In recent years, a range of businesses have made financing more readily
available to even the riskiest of borrowers. Greater access to credit
has put cars, computers, credit cards, and even homes within reach for
many more of the working poor. But this remaking of the marketplace for
low-income consumers has a dark side: Innovative and zealous firms have
lured unsophisticated shoppers by the hundreds of thousands into a
thicket of debt from which many never emerge.

Do You Know What You're Worth?

Federal Reserve data show that in relative terms, that debt is getting
more expensive. In 1989 households earning $30,000 or less a year paid
an average annual interest rate on auto loans that was 16.8% higher
than what households earning more than $90,000 a year paid. By 2004 the
discrepancy had soared to 56.1%. Roughly the same thing happened with
mortgage loans: a leap from a 6.4% gap to one of 25.5%. “It’s not only
that the poor are paying more; the poor are paying a lot more,” says
Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. …

Some economists applaud how the spread of credit to the tougher parts
of town has raised home- and auto-ownership rates. But others warn that
in the long run the development could slow upward mobility. Wages for
the working poor have been stagnant for three decades. Meanwhile, their
spending has consistently and significantly exceeded their income since
the mid-1980s. They are making up the difference by borrowing more.
From 1989 through 2004, the total amount owed by households earning
$30,000 or less a year has grown 247%, to $691 billion, according to
the most recent Federal Reserve data available.

“Having access to credit should be helping low-income individuals,”
says Nouriel Roubini, an economics professor at New York University’s
Stern School of Business. “But instead of becoming an opportunity for
upward social and economic mobility, it becomes a debt trap for many
trying to move up.”

The Brookings Institution

A new study by The Brookings Institution says lower income individuals
pay more than their higher income counterparts for everything from
mortgages to food. Cutting living costs for lower income families by 1
percent would “add up to over $6.5 billion in new spending power for these families,” the study says.

Limited choices, lack of knowledge and shady business practices contribute to lower income groups paying more, the study says. “Public and private leaders” should work to eradicate the problems by: encouraging mainstream businesses to work with lower income communities, working to end questionable business practices, and educating consumers, according to the study.

Lower Income Individuals Need Higher Education

Both BusinessWeek and Brookings highlight a truth common for many working poor/lower income individuals: a lack of education and knowledge.

Luisa Ajuria, profiled in BusinessWeek, didn’t obtain education beyond high school and explained that her mother said she “wasn’t college material.” When it comes to managing her finances, she signs documents without reading them.

The Brookings study says lower income individuals are less likely to have Internet access and strong financial knowledge–important tools when it comes to being fiscally fit–and urges support for financial education through a variety of means, including community colleges.

I agree with Brookings: education is key to empowering the working poor to make smarter financial choices. Not only would the working poor be well-served by learning more about finances at, say, a community college–they might land better jobs and increase their earning power
if they could find a way to earn a certificate or an associate’s degree in a field of their choice.

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Matt Schneider
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