Importance of Education
The implications of denial or non-participation in traditional financial institutions are far-reaching. From relying on expensive check-cashers and payday lenders for otherwise standard banking services to losing one’s home because of a predatory or sub-prime loan, the cost of uninformed financial decisions are extensive. Since people of low-income and people of color are more likely to live in communities saturated with non-traditional banking services, the financial costs associated with these services are heavily disproportionate for these populations. Ultimately, this can lead to a perpetuation of the cycle of poverty as money and capital are stripped from households in low-income and minority communities, giving them little chance to accumulate assets and savings to break free from poverty.
A recent report by Matt Fellowes at the Brookings Institution details a host of goods and services that typically cost more in low-income neighborhoods when compared to the same or similar services in higher-income neighborhoods. Including groceries, car insurance, mortgages and other financial products, general household furniture, appliances and electronics, those who live in poor neighborhoods, on average, pay more for basic necessities. Since the same services cost more, there is an effective tax, ranging from hundreds of dollars to thousands of dollars, for living in a low-income neighborhood.
This is not hard to imagine. If a household uses check cashers and payday lenders for their basic financial needs, rent-to-own centers for durable goods such as furniture, and a sub-prime lender for a home loan, one can see how costs for these products for this household would be substantially higher than if one were to use more traditional services. As Fellowes points out, some may claim caveat emptor, but this is not a reasonable argument if the household does not have access to more traditional services, either because of a spatial disconnect or because of a lack of knowledge.
Fellowes indicates that one important component of reducing these higher costs is to provide the consumer with basic financial education. Chairman of the Federal Reserve, Bernanke, also notes: “Financial education is a critical component of a robust and effective financial marketplace.” Through initiatives, such as O•N•E’s Options for Financial Success program, participants not only learn the basics of finances and building a banking relationship, but also how to budget and avoid higher priced consumer options, such as check-chashers, rent-to-own centers and payday lenders. This allows families to partake in traditional financial services, free up money, and take the necessary first steps towards a more financially independent and stable future.