People who take advantage of nonprofit credit counseling services have statistically significant reductions in consumer debt, according to a new study.
“We followed the credit records of counseled consumers and a comparison group for a year and a half following counseling, and found that counseling was associated with a large reduction in revolving debt, which includes credit card debt,” says Stephen Roll, research assistant professor at the Brown School at Washington University in St. Louis.
A year-and-a-half after counseling, the counseled group reduced their revolving debt by an average of $3,637, and reduced their total debt by $11,341.
Help in stressful times
“This recent work has focused on evaluating the impact of different aspects of nonprofit credit counseling programs, which seek to help financially distressed borrowers manage unsustainable debt loads through a combination of financial education, budget guidance, and debt restructuring products,” Roll says.
“The potential impact of these services on the balance sheets of American households is large, as nonprofit credit counseling programs serve millions of households a year.”
The new paper in Economic Inquiry evaluates the National Foundation for Credit Counseling’s “Sharpen Your Financial Focus” program, a standardized counseling program offered at 70 different agencies.
“There has, over the course of credit counseling’s 60-year history, been only one rigorous evaluation of this service—and our work represents a substantial extension of that earlier evaluation,” Roll says.
Using data on 6,094 consumers enrolling during the first quarter of the initiative through 13 different agencies, Roll and coauthor Stephanie Moulton of the Ohio State University also found that consumers enter counseling at times of substantial financial distress, such as a job loss or large unexpected expense.
Credit counseling and credit scores
“We find that the average counseled consumer experiences a drop in credit score and an increase in payment delinquencies in the first quarter after counseling, relative to the pre-counseling period,” Roll says.
“It is possible that credit counseling reduces consumer credit scores in the short term, particularly for those consumers participating in a debt management plan or who file for bankruptcy as a result of counseling.
“However, the credit drop persists in the non-debt management plan sample and after controlling for structural changes to debt, such as bankruptcy,” he says.
It is more likely that the expense- or income-based shock counseled consumers experience leaves them less able to manage their debts and motivates them to seek counseling.
“Given this, many credit counseling recipients appear to only be seeking counseling after their credit profiles have already started to degrade,” Roll says.
However, credit scores return to their pre-counseling levels about one year after counseling and—for those with the lowest credit scores—begin to exceed their pre-counseling levels by the end of the evaluation period.
“Our study is among the first to document this pretreatment shock using credit data and interventions targeting financial behaviors,” Roll says.
Even as counseling recipients experience substantial distress around the time of enrollment, the services provide a promising and cost effective source of assistance.
“Though nonprofit credit counseling services are typically free to the consumer, the services we studied cost roughly $125 to $150 to administer,” Roll says. “At the same time, in our most conservative estimates, we find that credit counseling is associated with an almost $1,800 reduction in consumer debt.
“This debt reduction may have substantial long-term benefits to the financial health of these households.”