20% or more APR. He also didn't realizehow easily he could reach the credit limit,and the stiff penalties incurred for late payments and over-the-credit-limittransactions. About one-third of credit cardcompany profits come from these and other penalties.Marty applied for a second credit cardafter maxing out his first one. The credit lineon his second card was exhausted in onlyeight months. Facing $4,000 in high-interestcredit card bills, Marty left college to pay off his debts. He never returned. Dropping outto repay credit card debt is all too common,and according to former indiana universityadministrator John Simpson, "We lose morestudents to credit card debt than academicfailure." Not coincidentally, by graduationthe average credit card debt for collegeseniors is almost $3,000. Credit card debtworsens the longer a student stays in school.A 2004 Nellie Mae survey found the averagecredit card debt for graduate students was awhopping $7,831, a 59% increase over 1998.Fifteen percent of graduate students carrycredit card balances of $15,000 or more.
A Glossary of the Fringe Economy
are small, short-term loans, usuallyof no more than $1,500, to cover expenses until the borrower's next payday. These loans come withextremely high interests rates, commonly equivalentto 300% APR. The Center for Responsible Lendingconservatively estimates that predatory paydaylending practices cost American families $3.4 billion annually.
Refund anticipation loans
(RALs), provided byoutlets of such firms as H&R Block, WesternUnion, and Liberty Tax Service, are short-termloans, often with high interest rates or fees, secured by an expected tax refund. Interest rates can reachover 700% APR-equivalent.
Check cashing stores
(ACE Cash Express is the biggest chain) provide services for people whodon't have checking accounts. These stores are mostoften located in low-income neighborhoods andcash checks for a fee, which can vary greatly but istypically far higher than commercial banks chargefor the same service. Check cashing fees havesteadily increased over the past ten years.
companies (outlets of suchcompanies as Western Union, Moneygram, andXoom) allow people to make direct bill paymentsand send money either to a person or bank accountfor a fee, typically 10% of the amount being sent,not including the exchange rate loss for money sentinternationally. the total cost can reach up to 25%of the amount sent.
give loans while holding objects of value as collateral. The pawnbroker returns theobject when the loan is repaid, usually at a highinterest rates. If the borrower doesn't repay the loanwithin a specified period, the pawnbroker sells theitem. For example, the interest charge on a 30-day
reach $25 billion by 2010.) If they sent $500 to Mexico on June 26, 2006, usingWestern Union's "Money in Minutes," they would have paid a $32 transfer fee.Moreover, Western Union's exchange rate for the transaction was 11.12 pesos for the U.S. dollar, while the official exchange rate that day was 11.44. The differenceon $500 was almost $14, which raised the real costs of the transaction to $46, or almost 10% of the transfer amount. Without a checking account, the Guzmans turnto money orders or direct bill pay, both of which add to their financial expenses.For example, ACE Cash Express charges 79 cents per money order and $1 or morefor each direct bill payment. If the Guzmans use money orders to pay six bills amonth, the fees total nearly $57 a year; using direct bill pay, they would pay aminimum of $72 in fees per year.All told, the Guzmans spend more than 10% of their income on alternativefinancial services, which is average for unbanked households. To paraphrase JamesBaldwin, it is expensive to be poor and unbanked in America.The Cooks and the Guzmans, along with people like Marty Lawson caught ina cycle of credit card debt (see sidebar), may not fully appreciate the economicentity they are dealing with. Far from a mom-and-pop industry, America's fringeeconomy is largely dominated by a handful of large, well-financed multinationalcorporations with strong ties to mainstream financial institutions. It is acomprehensive and fully formed parallel economy that addresses the financialneeds of the poor and credit-challenged in the same way as the mainstreameconomy meets the needs of the middle class. The main difference is the exorbitantinterest rates, high fees, and onerous loan terms that mark fringe economytransactions.
The Scope of the Fringe Economy
The unassuming and often shoddy storefronts of the fringe economy mask thetrue scope of this economic sector. Checkcashers, payday lenders, pawnshops, andrent-to-own stores alone engaged in at least 280 million transactions in 2001,according to Fannie Mae Foundation estimates, generating about $78 billion in gross revenues. By comparison, in 2003 combined stateand federal spending on the core U.S. social welfare programs—Temporary Aid to Needy Families (AFDC's replacement), SupplementalSecurity Income, Food Stamps, the Women, Infants and Children (WIC) food program, school lunch programs, and the U.S. Departmentof Housing and Urban Development's (HUD) low-income housing programs—totaled less than $125 billion. Revenues in the combinedsectors of the fringe economy—including subprime home mortgages and refinancing, and used car sales—would inflate the $78 billionseveral times over and eclipse federal and state spending on the poor.There can be no doubt that the scope of the fringe economy is enormous. TheCommunity Financial Services Association of America claims that 15,000 paydaylenders extend more than $25 billion in short-term loans to millions of householdseach year. According to Financial Service Centers of America, 10,000 check-cashing stores process 180 million checks with a face value of $55 billion.The sheer number of fringe economy storefronts is mindboggling. For example, ACE Cash Express—only one of many such corporations—has 68locations within 10 miles of my Houston zip code. Nationwide there are more than33,000 check-cashing and payday loan stores, just two parts of the fringe economy.That's more than the all the McDonald's and Burger King restaurants and all theTarget, J.C. Penney, and Wal-Mart retail stores in the United States combined.ACE Cash Express is the nation's largest check-casher and exemplifies the growthand profitability of the fringe economy. In 1991 ACE had 181 stores; by 2005 ithad 1,371 stores with 2,700 employees in 37 states and the District of Columbia.ACE's revenues totaled $141 million in 2000 and by 2005 rose to $268.6 million. In2005 ACE:
cashed 13.3 million checks worth approximately $5.3 billion (check cashing fees totaled$131.6 million);served more than 40 million customers (3.4 million a month or 11,000 an hour) and processed $10.3 billion in transactions; processed over 2 million loan transactions (worth $640 million) and generated interestincome and fees of $91.8 million;added a total of 142 new locations (in 2006 the company anticipates adding 150 more); processed over $410 million in money transfers and 7.6 million money orders with a facevalue of $1.3 billion; processed over 7.8 million bill payment and debit card transactions, and sold approximately172,000 prepaid debit cards.
Advance America is the nation's leading payday lender, with 2,640 stores in36 states, more than 5,500 employees, and $630 million this year in revenues.Dollar Financial Corporation operates 1,106 stores in 17 states, Canada, and theUnited Kingdom. Their 2005 revenues were $321 million. Check-into-Cash hasmore than 700 stores; Check N' Go has 900 locations in 29 states. Almost all of these are publicly traded NASDAQ corporations.
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