In 1997, I bought my first car. A blue Fiesta 1.1 with a manual choke. Those were the days! I had three checks to make before I handed over my hard-earned money. Did it have a radiator? Would the stereo take TDK 90 cassettes? And could I get insurance on it?
The first two I could see easily. The third ended up costing me almost as much as the car.
Nevertheless, I was pretty pleased with myself. That is until my mate in Essex told me how much he was paying for insurance. It was so much cheaper, I thought I had misheard.
Why was my car insurance more expensive? Not because of my car or the speaker set up, or even the way I drove it – it was my postcode.
The poverty premium is the extra you pay for ordinary things because you’re not rich. Research published this summer by Bristol University’s Personal Finance Research Centre for Fair By Design puts it at an average of £380 a year. They estimate that 95 per cent of low-income households fall victim to at least one form of the poverty premium, and one in 10 pay £736 or more as a result.
The car was simply where it caught me. Living in a “deprived” postcode adds an average of £153 a year to a motor policy. Around 60 per cent of low-income households also pay more for energy, because the cheapest tariffs are hardest to reach if you carry a debt or use a prepayment meter.
Meanwhile, four in 10 pay more for food, an average of £261 a year, because the big supermarket is a bus ride away and the convenience store is not. More than a quarter of low-income households pay more to borrow, at £178 a year, because the cheapest interest rates on loans and credit cards are often not available to them.
Not one of these things is a spending decision. Shopping around doesn’t change your postcode, energy meter or bad credit file. Instead, the causes are structural and desperately need fixing to give people fairer outcomes.
The Treasury published a financial inclusion strategy last November covering banking, savings, insurance, credit, problem debt and financial education. In July, the Treasury Committee called it a welcome first step but not yet a complete plan. It asked the government to show where exclusion is actually concentrated before deciding what to do about it.
The recommendations from the report are reasonable: take the surcharge off people who pay for energy by the “wrong” method; get affordable small loans to people who currently borrow at the top rates (this is being piloted now); make big lenders show who they actually lend to; and ask regulators to look again at what risk-based pricing does to affordability, because a system can price risk accurately and still price people out.
The government has been promising “good growth in every postcode” since the summer. This is the cheapest place to start, because nobody has to be given anything – they just need to stop being charged extra.
But none of this helps a 21-year-old buying a Ford Fiesta this month or a household topping up their energy meter as the weather turns.
Until the poverty premium is fixed, it’s important to do what you can to make sure you are not paying over the odds.
Check what you are being sold when you pay monthly. When you pay for products such as insurance in installments, that is effectively a loan and can end up costing significantly more. Look for the APR or total cost rather than the monthly figure.
Forget loyalty. From car insurance to energy tariffs, credit cards and savings accounts, loyalty will get you nowhere, so always check any renewal against a fresh quote. Although there’s nothing you can do about your postcode, unfortunately.
Check the no-claims bonus, because it is the one line on the form that belongs to you rather than your address, and it gets stronger every year.
Understand how the number is created. Knowing that your premium comes from your area’s claim history rather than anything you have done won’t lower it, but might stop you taking it personally.
The poverty premium did not stop me driving, but it did take almost everything I’d saved. And the reality is that the unfairness of the system meant I had to work harder unnecessarily – not to get ahead, but to put me level with someone in the next postcode.
If this government wants good growth in every postcode, it can start by ending the surcharge that people pay for buying their energy or insurance the “wrong” way. That’s a pricing decision, not a spending one.
Because nearly 30 years on, the worst-hit wards in Britain’s richest city are still clustered in the borough where I bought that car, and there’s not a song on one of my TDK 90 cassettes (ask your parents, if you don’t know what I’m talking about) that will make that all right.
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