Monday, December 13, 2010

Why We Are Poor: Late Fees

Fees Paid by Poor People


The Credit System is a Ponzi Scheme
We are in an economic depression.  nearly a quarter of the U.S. population is unemployed or out of work.*  I make a distinction between those two words, because the U.S. government also makes a distinction between the two words.  To the common man, out of work and unemployed means the same thing, but not so to the government.  To the government, unemployed means that you were recently employed and are capable of receiving unemployment insurance payments and that you will soon return to work.  All three of those stipulations must be met for you to be called unemployed.  And, that is how they can completely ignore the fact that we are in a depression.  Calling what we are in a "depression", in the government eyes, might provoke nationwide riots.  They want to avoid this because if the entire nation rioted then the outcome might just be we would throw them out of power, and they do not want that.  The reality is though we are in a depression.*



One of the most fascinating things during this time were all the hearings that were held on capitol hill, for those financial experts who received bailout cash, to explain why they received money to avoid raising fees and interest rates on consumer, while actually raising fees and interest rates on consumers.  The hearings of course meant nothing.  Not only were they, the policy makers, not going to demand the money back, but they were no more interested on whether or not fees and interest rates were raised than the man in the moon.

What was interesting however, was the follow up that all the media did on the financial institutions and credit card companies.  Here is what came out of those hearings.

College Students Given Credit Cards


College students are a special target for credit card companies.  Having zero credit rating is no bar for receiving a very high limit credit card.  Here is why:
  • college students as a whole have higher paying jobs than those with less education
  • college students will buy into the debt system easily because they are young and gullible
  • college students who make purchases during college will also take out loans for cars and houses later on, instead of saving their money
  • even if a college student does not pay off their credit card, it can be written off or the U.S. government will bail the company out
Credit cards were initially unavailable to the average citizen.  You could only get a credit card, if you had such a history of having excellent "paying off history."  There was no "credit rating."   Later a credit rating was devised and the system was rewritten to get most vendors of goods to only sell to those with good credit rating.  This way, those who would normally have a bad "paying off history" would think twice about not paying back their debts.  Thus the entire credit system was born.

Poor People are the Best to Give Credit To


It seems like an oxymoron to give credit to a poor person.  Common sense would say that a poor person, by definition, has no money.  But, it is untrue that poor people do not have money.  What is true is that poor people make horrible, awful, terrible decisions about the little money they have.  This is true, because this is why the financial institutions love poor people.  The worst bank on the planet Wells Fargo, specifically targets poor neighborhoods to open their banks.  Here is why financial institutions and credit card companies love poor people.
  • poor people have zero financial education
  • poor people tend to not read documents they sign
  • poor people take out loans
  • poor people think they have no choice when it comes to financial decisions
  • poor people, due to transportation issues, will more often than not, travel only two blocks away from their house to conduct major financial business
  • poor people will sign high interest loans, regardless of their financial circumstances
  • poor people have more trouble than others paying on time [this is a good thing in the credit card/bank's eyes]
  • poor people will always make payments instead of defaulting / closing accounts
  • poor people pay late fees
  • poor people pay fees
  • poor people will not pull their money out of the bank regardless of how many fees they are charged, because that would mean walking another 4 blocks to another bank
  • poor people pay more fees than any other financial group
The list is nearly endless.  And, while everyone is feeling sorry for the poor, you're thinking you're not "the poor".  The fact is, unless you fall into a household income of $100,000.00 / year, you fall into the category "the poor." *  What's interesting about the list is that poor people pay more fees than any other financial group.   Literally, Bank of America makes about $2 billion a year just in fees.  That is to say, Bank of America makes money off of nothing.  No goods are exchanged.  No transactions are made.  Hardly any labor is involved, since it is automated.  No services are given.  And, where services were rendered before, we are charged for ordinary transactions, just to do business with them.  They are literally charging you to do business with them.  They offer no explanation where the fees come from, but allocate it to things that, before, were the simple cost of running their own business, i.e. providing a live teller to conduct transactions.*

Poor people are a fantastic target for these institutions because they have no financial education whatsoever, nor do they shop around for the best possible financial solution.



I personally belong to a bank/credit union that has a total of 2 locations in the valley.  Sure it is not convenient, but I have no fees whatsoever just to conduct business, not even ATM fees.  Before I banked with several banks and fees started to creep up and up.  I took stock of what was going on immediately moved my money to my current bank.  It made no sense to make a pittance in a savings account and come out behind, annually, with fees.

What is eye popping crazy, is that late fees can be as much as half the cost of a monthly payment.  So the poor person is struggling to make the regular payment, and tacked on top of that is a gargantuan late fee.

We shouldn't feel sorry for the poor.  We, instead, should educate everyone financially.  The poor person should take stock of their situation and not get themselves into debt.  They also shouldn't send their family into debt, i.e. poor parents kicking their children out of the house.  That is just perpetuating poverty.

Here is something interesting.  In Italy, the cost of living in the city is ridiculously high.  Absolutely noone buys a house, nor moves out of their family's home.  So it is quite common to have 3 generations of family under the same roof.  In America we need our space.  Parents systematically kick children out of the house.  Can you imagine if not only your parents didn't kick you out of the house, but you, your wife and kids - your brothers and sisters and their spouses - also lived there?


Wealth Preservation


I already discussed wealth preservation in a previous article.   The concept is really simple.  And, it is this.  Instead of you living your life just so that you, yourself, can be rich and famous, you live your life so that your family can be rich and famous.  Most of the people that make it big with a personal skill, like sports or the arts, were backed up by family and friends who sacrificed of themselves to assist that person.  The rich do this as a matter of course, just living their daily lives.  They will not allow their children to go out of the house and split the families income, just because it is convenient.

I have heard poor people say hundreds of times, "I'll be glad when Johnny turns 18 so he can get out of my hair."  I want to turn to them and say they shouldn't have had kids, and if that is their attitude then they are an unfit parent or family member.  And, for all the people reading this and sympathizing with the person, I guarantee you, that woman/man probably was kicked out of the house at 18 themselves and has no wealth to speak of.  It was done to them, so they have no concept of family.

Family is for life, not just till college, or even worse, high school.  There is a large percentage of marriages that end in divorce shortly after the last child graduates from high school / college.  The two people were simply together once the children were done with them.  Neither person had any concept of family nor wealth preservation.  Not only did their children not pool their resources with the parents, but the parents split and split their own resources.




Conclusion



Finally, you cannot preserve any wealth if you are paying fees, "just cuz".  Remove your cash from any institution that charges you fees, just as a matter of course of doing business.  Do not take out loans.  It is fine to pay rent for 15 years and then purchase a house with cash.  In fact, you come out way ahead.

Credit is only good if you are using the credit to expand your business due to increased demand, not to buy groceries.  There is absolutely no need to have a personal credit card.  If you cannot afford something right now, you cannot afford it.

Pay cash for everything.  This includes writing checks.  Checks do not equal cash.  You need to budget yourself to such a degree, that you pay yourself an allowance.  You take your allowance and spend it however you want, but do not withdraw anything more until your next allowance.

The middle class is slowly disappearing.  Thirty thousand dollars a year in salary is no longer a good wage.  A vast majority of people make under twenty thousand dollars a year and are forced to support families on it.

Continuously educate yourself financially.  Educate your children financially.  Absolutely read everything before signing it.  You can negotiate terms on a contract, even if it is printed out.  If you do not agree to something then they have to rewrite the agreement or you can go somewhere else where they do agree with you.  There is absolutely no reason that you should sign a document that calls for tremendous interest rates, just because you want something right now.

*

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