The Boston Globe
By: Taryn Luna
July 6, 2011
NEW BEDFORD - Low-income families use costly check-cashing and loan services not because they lack access to banks, but because they lack knowledge of banking options and their advantages, according to a study by the University of Massachusetts Dartmouth.
For example, the study found that about one in four low-income residents in the New Bedford area do not have a bank account because they believe they cannot afford it - although most community banks and credit unions offer low-cost or free accounts as required by state law. In addition, the study found, even low-income residents with bank accounts still use check-cashing establishments more than their banks.
The study, which surveyed 173 low-income residents in New Bedford, belies perceptions that limited access to banks drives low-income families to use higher-cost alternatives, said Michael Goodman, an associate professor of public policy at UMass Dartmouth who oversaw the study.
With nearly 160 banking locations in the New Bedford area, Goodman said, the challenge is to educate people that maintaining bank accounts can help establish and build credit, increase assets, and lower household costs. A state legislative commission recently found that development of family assets, including savings accounts, is the most effective way to lift people from poverty.
``These are people who are living in a very informal economy,'' Goodman said. ``People need the opportunity to learn what the advantages are of having banking relationships, building credit history, and being able to access credit at some point in the future.''
On average, low-income people without bank accounts spend about 5 percent of their income, about $800 to $1,000 a year, on fees from check-cashing services, according to Bank On, a San Francisco program that aims to remove banking barriers for people with low incomes. That adds up to about $40,000 over a working life.
But residents without bank accounts are not the only ones wasting income, according to the UMass study. Nearly two out of three low-income residents with bank accounts said they still use check-cashing services. A key reason was that they could get money faster because of more convenient hours and locations.
Low-income residents often live paycheck to paycheck and put immediate needs ahead of long-term savings and financial planning, Goodman said.
The problem is not limited to New Bedford. About 15 percent of low-income households in Massachusetts and 20 percent in the United States do not use banks, according to a 2009 survey by the Federal Deposit Insurance Corp. The FDIC also found that statewide and nationally, black and Hispanic people are more likely to not have bank accounts.
In April, the Massachusetts Legislature created a Financial Literacy Trust Fund to help provide financial education for people with low incomes. Nationally, organizations such as Bank On are joining local officials, banks, and community organizations to bring free accounts and personal finance courses to low-income people. The program, sponsored by the FDIC, Federal Reserve, and Treasury Department, has spread to cities including Washington, Miami, and Seattle.
The UMass study provides a window on the views of people with low incomes and the challenges of bringing banking services to them. Some do not trust banks. Others said they do not need an account. Still others feared being charged fees they could not afford.
Karen Faria, 49, is among them.
The Fairhaven woman lost her job as a certified nurse assistant in March 2010 after she was diagnosed with cancer and had a mastectomy. When she wrote a check without realizing her account was $3.08 short, she was charged $90 in overdraft fees.
``I was afraid that something else might come up,'' Faria said. ``I said `I have no money to put in, and I can't pay the check fees that come up every month. I'm just going to close it out.' ''
The UMass study, conducted by graduate students, was suggested by the Community Economic Development Center of Southern Massachusetts, a nonprofit that advocates for low-income people. The goal was to understand barriers hindering low-income people from banking and to target programs to overcome these barriers.
The center serves 2,000 low-income people a year in the New Bedford area, most of whom seek help with income taxes. In helping people apply for the Earned Income Tax Credit, a government credit for low-income taxpayers, the center discovered that many people did not have bank accounts to deposit refunds in.
``If you don't have enough income to imagine that you can save, or you don't understand that you need a credit history, it's not really on the radar screen,'' said Goodman, the UMass Dartmouth professor. ``Even if one can't save in the short term, having that option to build assets and compound interest will give you access to a number of financial opportunities in the future.''
Taryn Luna can be reached at email@example.com