26/11/2012 11:57 GMT | Updated 26/01/2013 05:12 GMT

It's Expensive Being Poor - The Punitive Nature of Poverty


In 1999, T.V Smith, founder of the pioneering punk band The Adverts, sang "And I pay more for my food 'cause the supermarket's too far... It's expensive being poor because everything costs more." He had a point.

In America there's a name for the collection of inconveniences and expense associated with being poor. They call it the poverty tax. It's all about lack of access to the best deals and being forced into spending more through lack of choice.

A recent study by Watch My Wallet, the consumer affairs website for which I write, found some unexpected examples of a similar phenomenon at play in the UK. Low income individuals are more likely to get stung by certain fees, charges and premiums than better off people. It's a vicious circle.

Accidentally Going Overdrawn Costs More than a Wonga Loan

Watch My Wallet recently compared high street current account overdraft fees against payday loans. We based our comparison on the plausible (for lots of people) scenario of being £11 short two days from payday with a bill to pay.

In all cases, it turned out cheaper to borrow from than to slip into an overdraft. In one case, the charge for going overdrawn for two days amounted to almost four times the cost of borrowing from Unauthorised borrowing of just £1 at another high street bank would cost you over three times as much as borrowing £11 from the controversial payday lender, while the average cost for being £11 in arrears with a high street bank for two days is £13.27.

You can see which banks were the worst offenders here.

Bankruptcy costs more than a Luxury City Break

Aside from the emotional turmoil, ruined credit rating and inconvenience of not having access to mainstream financial products, Bankruptcy is actually too expensive for some people to contemplate.

In August 2012, bankruptcies fell to their lowest figure since 2003. Joanna Elson, Chief Executive of the Money Advice Trust, cited the increased cost of bankruptcy as the most likely driver for this trend.

"People struggling with debt often simply can't afford the £700 it costs to go bankrupt (£525 for the deposit plus £175 for the court fee), even though that would otherwise be their best option. This leaves them in a financial black hole. The number of people using debt relief orders, one of the cheaper remedies, has risen again."

The North East, despite having the fourth lowest average household debt in the UK, was the region with the most personal insolvencies in 2011. This interactive insolvency map of England and Wales reveals some troubling trends about poverty.

People in the North East are more likely to be unemployed than those living elsewhere in England, but they have relatively low household debt (fourth lowest). In terms of insolvency, it seems low income is more of a factor than high debt.

Bankruptcy brings with it other financial disadvantages too. Such as reliance on non-mainstream financial products such as pre-paid debit cards, which can swallow up to £1.75 in charges just for cash withdrawals, metered utilities and pay as you go mobile phones.

In an interview with Watch My Wallet, entrepreneur Kelly Bucher gave us a long list of the penalties she faced before she was discharged, including having to pay six months' worth of rent, plus one month's deposit up-front to secure a flat.

Being Poor is Going to Get More Expensive

Collecting child support from a non-paying non-resident parent will cost £12 when, under current government plans, the Child Support Agency becomes Child Maintenance Service in 2014.

While this isn't just a problem for low income parents (the charge will apply to any case where the CMS has to collect from a non-payer, regardless of income), the need for this CMS assistance with collection, which is currently free, will be more pressing for those on low incomes.

The economics of poverty also contributes to higher prices on mundane, every day purchases. Shops located in areas where car ownership is low tend to charge more for the essentials, like milk and bread. Locals can't get to the big supermarkets conveniently or quickly, so end up paying a premium for the milk. People without cars can't do a "big shop" so they rely on smaller, local shops.

When an expensive appliance like a cooker breaks in a low income house, the cost of replacing it is higher than in a financially comfortable household. Unless the low income household has the money to buy a replacement, they'll inevitably need credit, typically hire purchase, to fund the replacement. This can cost up to three times as much as buying outright.

In a 2011 report, Save the Children found that households earning less than £12,700 pay £253.17 extra for electricity, due to the limited range of tariffs available and metered supplies. Hopefully the planned changes to energy tariffs will be the first step toward making poverty less punitive.