Tax Season is Hunting Season for Predatory Lenders
January is tax season but is also hunting season for Predatory Lenders. Thankfully, there are also initiatives that respond to predatory lending during this time. Initiatives such as Poverty Awareness Month.
Roughly 10.4 million American's are classified as the working poor. These are families who either had low paying jobs, working part time or seasonal jobs but still fall below the poverty line.
During tax season, many families may receive upward to $5,000 in federal tax refund because they have multiple children, attend college part time, pay child-care and medical expenses through the year. They likely have exemptions such as child-care, education, additional child tax credit and will likely qualify for the (EITC)Earned Income Tax Credit.
Each year the Federal government returns $60 billion to millions of struggling households in the form of the EITC.(Earned Income Tax Credit) With over 60 billion in earned income credit disbursed to the working poor every tax season, predatory lenders seize the opportunity to prey upon a class of Americans who receive so much cash without being properly educated on their consumer rights or financial literacy. They are like sharks waiting patiently for a school of fish to swim right into their mouths.They spend millions in marketing to specific target areas and communities where EITC among the population is high and financial literacy is low. Tax preparation businesses, which generate $10 billion in profits annually all directly from the pockets of the working poor. It is so profitable, that they only operate for a few months out of the year with record net profits.
RAPID REFUND: These businesses will prepare taxes for the working poor for a fee. This is typically families who have never been taught how to read their paystub, much less file their taxes and often come from generational poverty. The companies heavily advertise a low price of $9.99 for electronic filing but then after filing the taxes, they offer "rapid refund" which promises that they will receive their return in 3-5 days, This sounds very tempting to the working poor whose car is running on fumes. The company runs them through a short term cash advance financial institution and charges upward of $250.00-$400.00 for what is to them routine work that can take a matter of minutes. The APR is one of the highest in the country for such a short term loan advance. Due to not understanding what an annual percentage rate is, they sign the paperwork and pay the fee in their lack of knowledge, disclosure and desperation
CHECK CASHING: No sooner than they receive their refund, they realize due to not having a checking account, they have trouble cashing the refund check. That is where check cashing stores come in an offer to cash them for 1-2% of the amount of the check. That will cost the consumer another $50.00-$150.00. Before they even had the cash in hand, they have already lost the same amount of money that could have paid their rent for a month to predatory lenders.
SALES BAITING: Then there are the sales. The communities are bombarded with gimmicks, billboards, commercials, junk mail, emails and even mobile marketers dancing outside of centers promising that prices are the lowest that they have been all year. They use terms like "liquidation sale" and "clearance items" as well as tug on the emotions of the consumer with quotes like "get the car that you deserve." The term "deserve' is the keyword that triggers impulsive purchasing. The consumer will treat themselves because they have worked hard all year without first considering if the product is high quality or if they can afford it. It is marketing manipulation. It is quite tempting to take your family to purchase new shoes, a car you cannot afford and a nice dinner after working hard all year with no disposable income. Within days, the thousands of dollars trickles away and they are back in the same position that they were in before.
If you are a family in this demographic, I have created a plan below for you to follow. Following this plan will not only save you a lot of money but put you one step ahead in the new year.
First of all, do not have your taxes prepared by the multitude of places offering “rapid refunds.” There are always free tax clinics in your community. Google online for FREE tax preparation for the working poor. If there is no free tax clinic nearby and you are technologically savvy, file online at www.irs.gov. You recieve your refund in ten days with no charge with the exception of the e-file fee. If you do not know how to file, hire a preparer without the rapid refund.
If you do not have a checking account and have to pay the 1%, then fine but open a checking account as soon as you cash the refund check. PNC Bank offers a "Fresh Start" program for those who need a fresh start.
Once you receive the refund, create a budget and call it "The past, present and future plan." You can find templates for any budget on Google. This will take you out of the mentality of merely surviving and into a mentality of thriving. If you are in social services and counsel the working poor, you can also use this as a tool in helping the make the most of their tax refund.
30% TOWARD YOUR PAST - This is specifically for those things that seem to haunt you.
- Old medical/dentist copays - These are co-pays and deductibles that have managed to stack up in your drawer like mismatched socks.
- Student Loans - If like me, you have a child named "Sallie Mae" that refuses to grow up, pay down your student loan debt. Every time you pay the minimal or defer your student loan, they add interest to the balance so the balance never really goes down.
- Unpaid traffic tickets - You had a choice. Your light bill or a traffic ticket. This is a good time to pay your old ticket or get your license reinstated from unpaid tickets so your are not constantly looking over your shoulder.
- Collection Agencies - Those people who keep harassing you or the bills that you have been paying last for the past six months. Most collections agencies will accept a settlement during tax season. If you owe a bill that is $600, they will often take a $300 settlement. This will not only save you a lot of money but also prevent a potential garnishment as well as improve your credit rating.
30% TOWARD YOUR PRESENT: This is for all of you present obligations.
- Catch up all of your bills - Pay everything current. Sometimes in the winter, your electric and/or heat bill may increase which may cause you to fall behind. In fact, pay one month ahead. Slip in a little note to credit your account for one month. To will come in handy when you face sudden car repairs.
- Pay your auto insurance six months in advance - Typically you will get 10-20% discount for advance payments. This will not only save you money but also decrease your monthly obligations for a portion of the upcoming year.
- Pay your credit cards down or completely off. Credit cards are just a modern form of bondage. Continuing to use them is just choosing to keep yourself in economic opession. There is nothing wrong with keeping a low balance to accrue your credit score but when you are using it to pay for groceries, you now you are in trouble.
- Car repair and maintenance - Winterize your car with an oil change, tires and or breaks. This will prevent further damage in the year.
- Stock up - Stock up your refrigerator and cabinets with an abundance of supply with things that you use often such as pasta, can foods, frozen foods. You can go to Costco and/or Sams Club to purchase in bulk. This will come in handy when your hours are cut or you have an unexpected expense.
- Your children are your future - Purchase your children a new winter coat and new school supplies. Whatever you do, do not purchase video games and other garbage that keeps them in front of the television. Instead, purchase annual family passes to local museums, theaters and the zoo. This will give you free admission for the year for a small lump sum so instead of laying around the house, pack up and take your children to learn and spend quality time.
30% TOWARD YOUR FUTURE: This is where you put money in savings. You only dip into it for emergencies only.
10% DISPOSABLE INCOME: This is the amount left over after all the above has been paid. This only applies if you followed the above budget. You can get your hair and nails done, go to a nice dinner and a movie, whatever you desire.
Of course this budget can be manipulated based on the amount you receive/owe. You may not have anything from your past or have all of your present obligations caught up so that may free your budget to put toward other areas. Whatever the case, commit to not blowing your refund on things that keep you in bondage. This plan will help catch you up and relieve a lot of stress for the upcoming year.
January is ‘Poverty Awareness Month.’ If you are a writer or blogger, please spread awareness by sharing visions, stories and ideas about how to address poverty in America and worldwide. #FixIt
Katrina Smith is a simple mid-western girl born and raised in the inner city of Indianapolis, Indiana. After teaching financial literacy, prison re-entry and community development in underserved communities for ten years, she now works a full time job in the IT Recruiting Industry of corporate America. She is a freelance writer and author of four books and workbooks and is working on her new book ‘Weed & Seed: A Comprehensive Guide to Escaping Dependency on the Government System' set to be released in the Fall of 2015. For more information, visit www.wisdomisashe.com