What Is The Poor Tax?
June 28, 2016
If you have been following this political season you have probably noticed that income inequality and all those associated with it have been hot topics. One of these things frequently mentioned has been the “poor tax”. Now , what you should know about this is that it doesn’t actually refer to any actual tax by the Government on people for being poor. What this really refers to is the extra cost that poorer people end up paying for things through higher interest and fees.
Now it is common fact that credit scores and incomes usually trend together. This means that generally speaking the more money you make the higher you credit score will be. While income doesn’t technically factor in a credit score a person making more money will usually be in a better position to pay their bills on time and keep their balances low. So what happens over time is that a wealthy a person will have lower interest rates and lower monthly payments for the same goods and services compared to a person who makes much less.
Let’s take buying a car for a example. In 2015 the average cost of a brand new car was $33,500. So let’s say that a rich person with a great credit score and a poor person with a poor credit score each bought the same car at that price, fully financed over 60 months. The person with a great credit score could expect an interest rate of around 3% and the person with a low credit score could expect an interest rate around 19%. This means over 60 months the rich person would have a monthly payment of $602 a month costing them total $36,120. A poor person with a low credit score on the other hand would have a monthly payment of $869 costing them $52,140 in total over the 60 months. So as you can see having a low credit score not only costs the poor person $267 a month but costs an extra$16,020 over the life of the loan. This means the poor person with bad credit will pay an extra half car in interest over the rich person with great credit.
So, as you can see the “poor tax” people speak about can really impact your quality of life by forcing you to pay a premium for good and services. Now, here at CRE Credit Services we can’t make you any richer but we can help you improve your credit score so you will be able to avoid high interest and fees, so that you can afford things in your budget.