Poor families face £1,000 a year 'poverty premium', say charities

Poor families face £1,000 a year 'poverty premium', say charities

Poor families have to pay on average a £1,000 annual "poverty premium" for essential goods and services such as gas, electricity and banking, because they cannot access the deals enjoyed by better off households, charities say today.

A report by Save the Children and the Family Welfare Association reveals that the extra costs borne by an average-sized poor family simply in paying bills or buying basic goods can amount to almost 10% of their disposable income.

The study, The Poverty Premium, adds up for the first time the range of ways in which the poor are forced to pay more, including the additional costs of prepaid gas and electricity and the expensive credit targeted at those with poor credit ratings.

It shows how an oven costs 150% more when bought on credit from suppliers targeting those on low incomes than when paid for up front, while gas bills are 10% higher when paid through pre-payment meters rather than by direct debit and electricity 8% higher.

Colette Marshall, UK director of Save the Children, said: "It is a matter of gross injustice that the families who are struggling most to get by from week to week are being forced to pay more for essential things like heating their homes."

Helen Dent, chief executive of the Family Welfare Association, said the government needed to focus on the inequalities in expenditure facing poorer families as well as seeking to boost their incomes.

The report contrasts the range.....continued below

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of means of spreading the cost of basic consumer goods on offer to better off families, including hire purchase and credit cards, with the "sub-prime" credit shops such as Brighthouse and its catalogue equivalents which disregard credit history but charge high interest rates and hefty mark-ups on retail prices. A cooker from Argos would cost £159.99 for those able to pay up front, for example, while an identical model paid for over 125 weeks from Brighthouse would cost £405.

The vast choice of cheap credit options available to the majority, including low interest overdrafts, low cost personal loans and credit cards with interest free deals, meanwhile, are out of reach of the poorest, who without bank accounts or conventional credit cards often turn to doorstep lenders charging up to 300%.

With more commercial transactions over the phone or internet, the report highlights the emergence of a market in sub-prime credit cards aimed at those on low incomes or with a poor credit history and charging interest at up to 177% APR.

The poor are also penalised when seeking cash quickly, as they are less likely to have access to charge-free cash machines, and may use expensive cheque cashing services or pawnbrokers.

But energy prices are one of the most unavoidable burdens for those on low incomes, who are both at greater risk of fuel poverty and more likely to live in an energy inefficient home, according to the study. They must not only pay more for pre-pay meters but, because VAT at 5% is payable on energy, they also pay more VAT per unit. A greater reliance on pre-pay mobiles, which have higher call costs than contract mobiles, also hits the poor, as do higher insurance premiums payable because those on low incomes are more likely to live in areas of higher car and property crime.