One of the best routes out of exclusion is through economic opportunity.
Yet individuals and families in disadvantaged areas are doubly deprived in
terms of finance. They have less money to start with and they also
find it harder to gain access to credit.
Millions of households in the US lack even the most basic of financial products, such as bank accounts or renters insurance. Millions more are on the margins of financial services provision. Of those who are excluded from mainstream credit (banks, credit unions or unsecured credit cards), it is the most vulnerable who must turn to the more expensive credit providers like check cashing services, title pawn, and payday lenders. Tens of thousands more are forced to use illegal moneylenders charging even higher rates. People excluded in this way, do not have access to full financial citizenship and their capacity to contribute to the local economy is severely inhibited.
Financial Literacy
Financial Literacy is a
process through which an individual or family can be changed by a shift in
basic habits – for instance, going to a bank to open a savings or checking
account to deposit a paycheck, as opposed to a high rate check cashier, thus
saving hundreds of dollars a year. It
is a basic understanding of banking, savings and the importance of good
credit that allow a low or moderate income individual or family to actually
buy a home or start a small business, encouraging increased economic
stability in the community.
Financial
Literacy is at the very core of healthy families and communities.
A basic understanding of money, and how it works in today’s
society, is crucial to a person’s ability to develop assets.
The development of assets, large or small, is the very first step in
the dynamic process of introducing a person into the financial mainstream,
increasing family stability, encouraging better consumer habits, and
eventually increasing an individual’s stake in the health and wealth of a
community.
Data Shows Need
The
Federal Reserve has gained a better understanding of the issues related to
family financial management through its Survey of Consumer Finances, a study
of 4,500 households that is undertaken every three years.
From its most recent survey, conducted in 1998, it was learned that
approximately 13.5 percent of all families surveyed do not maintain a
transaction account with traditional financial institutions, with nearly 83
percent of these households reporting annual incomes of less than $25,000.
When asked why they did not maintain a checking account, 28.4 percent
stated that they "do not write enough checks to make it
worthwhile." Another 18.5
percent of the survey respondents in this group indicated that they "do
not like dealing with banks", and 7 percent replied that they
"cannot manage or balance a checking account."
Also noteworthy is that only 1 percent indicated that banking
locations or hours of operation deterred them from maintaining a banking
relationship.
Given
this information, the Federal Reserve conducted additional research to help
better understand how lower-income households use credit and savings
products and to estimate the potential demand for these services.
Through this study, they found that lower-income consumers rely on
alternative financial service providers, such as check cashers and pawn
brokers to conduct personal financial business, such as cashing checks,
paying bills, and obtaining credit. This report cited studies indicating that check cashers
charge four to six times more for their services than banks and that
consumers relying on these facilities spend approximately $500 annually to
obtain services that would cost roughly $60 a year at a bank.
This research also noted surveys indicating that consumers who use
alternate sources for credit are paying exorbitant interest rates and fees,
citing evidence that loans from pawnshops are typically fifteen times more
expensive than credit from banks.
These data demonstrate how lower-income families are unnecessarily losing a substantial amount of money in conducting basic financial transactions, thereby reducing their capacity to save and ability to weather any financial shock, such as the loss of a job or a long-term illness of a family member. For these families, financial literacy could improve their ability to reduce expenses for financial services and increase savings capacity. The need for financial education is further evidenced by the fact that personal debt and bankruptcy rates are high, saving is at its lowest level in seventy years, and the existence of abusive lending tactics is undermining the work that has been done to bring economic promise to disadvantaged families and neighborhoods.[1]
[1] Source: “Financial Education: The Next Chapter in Community Development”, Remarks by Federal Reserve Board Vice Chairman Roger W. Ferguson, Jr. before the Pittsburgh Community Reinvestment Group, Pittsburgh, Pennsylvania, October 19, 2000.
© 2004 Family Services Center - Huntsville, AL