In addition to rising costs for rent, food, child care and utilities, low-income Long Islanders face an often invisible economic headwind from bank fees, burdensome loan terms and high interest rates.
Aside from questionable bank fees, often called "junk fees," they may take on high-interest loans, sometimes larded with costly fees or add-ons, said Nadine Chabrier, senior litigation and policy counsel at the Center for Responsible Lending, a nonprofit advocacy group.
"People are nickel and dimed," she said. "It's really staggering when you look at the full picture. It disproportionately falls on people with lower income and people of color."
In some cases, the net effect drives low-income people away from institutions used routinely by Americans to manage their financial lives, said Mariano Torras, a professor of economics at Adelphi University.
WHAT TO KNOW
- Low-income families are far more likely to lack a bank account.
- Low-income bank clients also are more likely to face fees.
- Regulators and reformers are pressuring banks to rein in "junk fees."
"There are all kinds of charges that are almost meant to limit [banks'] clientele to people with money," he said.
"There is no question that overdraft practices push people out of the banking system altogether," the Center for Responsible Lending said in a statement issued at a July 2021 hearing of the House Financial Services Committee.
Nearly 40% of former bank customers cite high or unpredictable fees or not having enough money as the primary reason they no longer have an account," a 2021 Federal Deposit Insurance Corporation survey found.
Lower-income households, including Black and Hispanic households, were more likely to be "unbanked" — where no one had a checking or savings account at a bank or credit union, according to the FDIC report. For example, among households nationwide with income between $30,000 and $50,000, 8% of Black households and 8.4% of Hispanic households were unbanked, compared with 1.7% of white households, the FDIC found.
Overall, 5.9% of New York households are unbanked, according to the survey. Without a bank account, residents are often forced to pay fees for money orders or check cashing services.
Should they remain as bank customers, low-income customers are far more likely to pay sundry fees. About 16% of consumers earning under $50,000 a year were likely to pay a bank overdraft fee, compared with 7% of consumers earning more than $100,000, an analysis of 2022 consumer surveys by the Federal Reserve Banks of Atlanta, Boston and San Francisco found.
The issue of junk fees has caught the attention of regulators, including New York State's Department of Financial Services, who are "eating away at the edges" of the problem, Chabrier said.
The New York agency has called on banks it regulates to avoid landing a double whammy on consumers who are assessed an overdraft protection fee (triggered to avoid overdrafts) in addition to an overdraft fee when funds from a linked account are insufficient to cover the initial overdraft.
Overdraft fees, which can average $35, can kick in when an account doesn't have sufficient funds but the transaction is processed, either by dipping into a linked account or credit card or by the financial institution deciding to cover the shortage.
Checking accounts are deemed to have non-sufficient funds when the money in the account doesn't cover all transactions and the bank or credit union declines to cover the difference. Non-sufficient fund fees typically average more than $30.
Two banking giants, JP Morgan Chase Bank and Bank of America, have responded to regulatory pressure, dropping fees on non-sufficient funds after they reported $1.2 billion and $1.1 billion, respectively, in revenue from overdraft and non-sufficient fund fees in 2021.
"The collateral damage of overdraft fees can be that someone loses their account and becomes unbanked," Chabrier said. "It's definitely something that happens to low-income people."
Another financial gambit that can ensnare those with lower incomes are buy-now-pay-later deals often offered by retailers who partner with financial tech companies. Buy-now-pay-later, also known as point-of-sale loans, can be attractive to those who don't have a credit card and want to spread payments for an item.
The plans typically let the buyer put down 25% of the price and take home their purchase, requiring them to make three additional no-interest payments of the same amount every two weeks. But, Chabrier said, the plans often include hidden fees or late charges.
And on Long Island, where a car is more necessity than indulgence, obtaining an auto loan also can pose extra costs for lower-income buyers with poor credit ratings.
"They live in an area constructed for cars," Torras said. "You can't live without a car."
The average loan rate to finance a used car was 5.99% in May for those with excellent credit, according to Bankrate data. But for many low-income residents, an excellent credit score is out of reach. For those with a subprime credit score below 500, the interest rate nationwide soared above 20%.
Newsday wants to hear from Long Islanders about how they face the region's cost of living. Tell us your story here.
How to avoid costly financial fees
- ATMs: Stay within your bank or credit union's network or get cash back when you make debit card purchases.
- Checking account monthly fees: Many banks and credit unions offer no-fee checking accounts. Non-profit Cities for Financial Empowerment Fund lists institutions whose accounts meet its "Bank On" standards at joinbankon.org/accounts/. Credit unions, which are owned by members, also are known for free or low-cost accounts.
- Sign up for direct deposit: This may allow you to get a waiver on minimum balance fees.
- Link your checking and savings accounts: This may avoid overdraft fees.
- Track your finances: Institutions often offer easy ways to track balances online or through alerts sent by email or text.
- Be wary of financial products that could inflate costs: Buy-now-pay-later and auto loan add-ons can lead to unforeseen expenses.
Ken Schachter covers corporate news, including technology and aerospace, and other business topics for Newsday. He has also worked at The Miami Herald and The Jerusalem Post.
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July 30, 2023 at 04:00PM
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Bank fees, high interest rates hit low-income Long Islanders hardest - Newsday
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