FRM 3

9/2002

Abstract

The Impact of Credit Counseling on Subsequent Borrower Credit Usage and Payment Behavior

Prepared by: Sissy R.Osteen, Ph.D.

Resource Management Specialist

104 HES

Oklahoma State University

Stillwater, OK 74078-6111

(405) 744-6282

osteen@okstate.edu

Staten, M.E., Elliehausen, G.E., & Lundquest, E.C. (2002) The Impact of Credit Counseling on Subsequent Borrower Credit Usage and Payment Behavior, Retrieved from http://www.nfcc.org/mo/commark/news/counseling_study032102.pdf

IMPLICATIONS FOR COOPERATIVE EXTENSION. Lack of adequate money management skills is an issue frequently identified as troublesome for the citizens we serve. Individuals who seek counsel from Extension Educators are having even more significant resource management issues. Educators frequently counsel these individuals or refer them to a counseling agency. This study evaluates the impact of a counseling intervention in addressing consumer behaviors.

Overview: Financial counseling is frequently sought as an alternative to bankruptcy. Between 2 and 2.5 million financially stressed individuals and families required financial counseling in 2001. Member agencies of the National Foundation for Credit Counseling (NFCC) provided counseling for 880,000 new clients in 2000.

Almost one third of counseled individuals will enter into a repayment agreement, a Debt Management Plan (DMP), with their creditors to repay their debts. It is not difficult to track the progress of these individuals. However, two thirds of counseling clients receive a budget review, educational sessions, and do not require further intervention by the counseling agency. There has been no empirical research to determine how these individuals fare – even though they make up the majority of clients seen by NFCC agencies.

A study was conducted by researchers at Georgetown University to determine the impact of credit counseling on subsequent use of credit and payment behavior for those clients who received counseling from NFCC agencies, but did not enter a DMP.

Methods: Credit performance of clients was measured by credit bureau data for a three year period from June 1997 to June 2000. These data were matched to data of a comparison group. Regression was used to determine the impact of counseling and obvious factors that may be related to borrowing payment behaviors were controlled for. Ten measures of borrower behavior post counseling were examined including: credit worthiness, number of accounts, balances, and payment performance.

Results: The study found that individuals who received financial counseling improved more over three years than those who did not receive counseling. Over 50 percent of those counseled three year earlier had improved credit scores. Most clients who received counseling had reduced the number of open accounts with balances, total debt, and total unsecured debt. Most clients experienced

The Impact of Credit Counseling on Subsequent Borrower Credit Usage and Payment Behavior (continued)

fewer delinquencies in payments than the control group.

Conclusion: The results of the research reflect that financial counseling alone, without a structured Debt Management Plan, positively affects credit use and payment behavior. Most individuals experienced improved credit scores, lessened use of credit, and lowered total debt and lowered unsecured debt. Additionally, most counseled individuals had lower delinquency rates than similar individuals who were not counseled. All of these changes are consistent with education, goal setting and information sharing that occurs within the context of financial counseling.