As Financial Capability Month 2023 comes to a close, we are urging the passage of policies that can help close wage gaps and make economic mobility a reality for millions of people—critical legislation that will increase incomes, ensure access to fair, affordable banking and support accurate credit reporting.
Financial stability is the foundation of every family’s economic mobility. Yet far too many people run up against systemic hurdles that undermine their ability to earn higher incomes and build wealth. Increasingly, the rising costs of housing, childcare, food, and other living necessities have widened the chasm of economic inequality. In many of the disinvested communities with which LISC and our local partners work—particularly communities of color and rural places—residents lack access to good-paying jobs, affordable financial services and credit-building resources, and that, in turn, shortchanges financial stability.
As we lift up the imperative of economic wellbeing this Financial Capability Month, we want to stress the role that federal policies can play in driving systemic change. To address the root causes of economic insecurity, it’s essential to enact federal policies that expand income and wealth-building opportunities, while enhancing protections against predatory financial practices. The three policy areas outlined below are critical spheres of opportunity that Congress and the Administration can advance to help build a more inclusive economy.
Increasing the Federal Minimum Wage
Income inequality is a significant driver of financial insecurity, and the gap between high- and low-wage earners has steadily increased over the past forty years. Recent research shows that 90 percent of workers earn only about 59 percent of wages—far less than their fair share–while the top five percent earn nearly 30 percent. It’s no wonder this discrepancy has left 42 percent of U.S. households unable to meet basic needs. The federal minimum wage provides the baseline earnings for many low-wage employees. It is a critical tool that should be leveraged to better promote financial stability for people earning hourly wages.
The last time the federal minimum wage was last adjusted was 13 years ago. It was increased to $7.25 per hour in July 2009, and we are now experiencing the most prolonged period of a flat federal minimum wage since its establishment. Adjusted for inflation, this represents a 27.4 percent decline in earnings over this same time despite significant gains in worker productivity.
Passage of the Raise the Wage Act would bolster household incomes by gradually increasing the federal minimum wage from $7.25 to $15 per hour over five years. This would increase wages for nearly 32 million Americans, or 21 percent of the workforce. Moreover, by increasing the minimum wage, we would also be investing in closing longstanding racial income disparities: wages would rise for nearly a third of all Black workers and for more than a quarter of all Latino workers.
Expanding Access to Affordable Financial Products
Access to affordable banking services is essential to financial stability and resilience. However, nearly 1 in 5 households were unbanked or underbanked as of 2021, a fact that disproportionally impacts families with low incomes, particularly households of color. Excessive fees mean full participation in the modern banking system remains out of reach for many people.
Inequitable and disproportionate consumer overdrafts and non-sufficient fees—charges levied by a financial institution when transactions on a consumer’s bank account exceed the amount available within their account—are a persistent challenge to inclusive banking and comprise the majority of fees consumers pay for bank accounts. Banks collected an estimated $15.7 billion in overdraft and non-sufficient fees in 2019 alone. Vulnerable populations bear the brunt of these fees; median account balances of less than $350 and just nine percent of consumers are the source of nearly 80 percent of all overdraft revenue. Particularly harmful are compounding costs that freeze out many low-income consumers, leaving them with large debts and closed bank accounts when they cannot repay. On top of overdrafts, these practices may end up increasing the unbanked population, particularly within Black and brown communities.
While several banks have taken steps to rein in their excessive banking fees, we can and must do more to safeguard all consumers. The Consumer Financial Protection Bureau should continue to provide enhanced regulatory oversight and research into these practices. Congress can build on this momentum and pass the Stop Overdraft Profiteering Act and the Overdraft Protection Act to adopt comprehensive banking guardrails that help people keep their earnings.
Supporting Strong Credit Histories
A strong credit history is also critical to developing financial stability. Yet many people from low-wealth communities have negative or little to no credit history and low or no credit scores. This often leads to a range of difficulties accessing capital, securing housing and utilities, and even obtaining employment. We must ensure consumer credit reports are accurate or we risk allowing errors to continue to undercut socioeconomic opportunity.
In many cases, the current structure of our credit reporting system, which relies on private consumer reporting agencies (CRAs), exacerbates credit pitfalls that historically underserved communities face. For example, errors on credit reports disproportionally impact consumers of color and are extremely difficult to dispute. In just the last three years, the CFPB’s Consumer Complaint Database has received nearly 1.4 million complaints related to credit reporting, more than 1.2 million additional complaints than the second primary complaint of debt collection. Of these complaints, 99 percent are due to incorrect information in reports, and the vast majority result from the data attributed to the wrong individual.
Passing the Comprehensive CREDIT Act would enhance federal oversight of CRAs and empower consumers to safeguard their credit reports. The legislation would address longstanding disparities associated with inaccurate credit reports through improved data-matching requirements, increased consumer knowledge and regulation of the dispute and appeal process for people who find errors in their reports. Just as important, it would require CRAs to provide timely, direct information to consumers themselves.
Driving Lasting Change
Shoring up financial stability through federal policies is key to nurturing shared prosperity. Congress has a significant role to play in promoting the financial stability of millions of Americans through policies that increase incomes, ensure access to affordable banking, and support accurate credit reporting. By advancing these policies, among others, we can help level the playing field and reduce the rampant economic inequality that impacts so many families from America’s low-wealth communities.
About The Author
Michelle Harati, Senior Policy Officer
Michelle advocates for federal policies to broaden pathways to opportunity, supporting multiple LISC national programs, including: economic development and small business, workforce development and financial capability, creative placemaking, and AmeriCorps. Before joining LISC, she worked with the City of San Diego Economic Development Department as a Community Development Specialist. She was also a Senior Asset Building Coordinator at the International Rescue Committee's (IRC) Financial Opportunity Center in San Diego and served two terms as an AmeriCorps member. Michelle holds a B.A. in Political Science from the University of California, Los Angeles, and a M.P.P. from Georgetown University.
@michelleharati