Credit counseling: a substitute for consumer financial literacy?

Abstract

Is financial literacy a substitute or complement for financial advice? We analyze the decision by consumers to seek financial advice in the form of credit counseling. Credit counseling is an important component of the consumer credit sector for consumers facing debt problems. Our analysis accounts for the endogeneity of an individual's financial situation to financial literacy, and the endogeneity of financial literacy to exposure to credit counseling. Results show counseling substitutes for financial literacy. Individuals with better literacy are 60% less likely to use credit counseling. These results suggest that credit counseling provides a safety net for poor financial literacy.JEL CODES: D10, D12, I22

Financial literacy, financial advice, and financial behavior

“…Again, the literature provides a number of examples of potential endogeneity due to a reverse causation channel. Disney et al (2015) investigate the effect of financial literacy on the decision to seek credit counseling and argue that financial literacy may develop endogenously with the receipt of credit counseling. Bucher-Koenen and Lusardi (2011) hypothesize that individuals with higher levels of financial literacy might better recognize the need and the financial benefits of saving for retirement and thus be more inclined to enroll in a savings plan.…”

“…Using a large-scale survey among households in 15 EU countries, the authors empirically confirm that trust only matters for the less literate consumers. Similarly, Disney et al (2015) recently analyze the decision of indebted consumers in the U.K. to ask for financial advice in the form of credit counseling and conclude that professional counseling substitutes for financial literacy: answering an additional financial literacy question correctly reduces the likelihood of an individual seeking assistance by roughly 60%. As can be seen from Table 5, which provides a summary of the empirical evidence regarding the link between financial literacy and advice-seeking, other studies also provide evidence pointing to a negative relationship between financial literacy and the demand for expert financial advice.…”

The effects of perceived and actual financial knowledge on regular personal savings: Case of Vietnam

“…Since there has been an increasing interest in financial literacy and individual financial behaviour, most of the research in this area concentrate on actual financial literacy, and many of them have been conducted by Lusardi & Mitchell, (2011);Mahdzan & Tabiani, (2013) ;Lusardi & Tufano, (2015), Disney et al, (2015); Calcagno & Monticone, (2015). Research has proved that there is a close relationship between financial literacy and financial behaviour (Xiao et al, 2010).…”

“…According to Jappelli & Padula, (2015), there is a positive association between financial literacy accumulated early in life and the individual's wealth and portfolio allocations in later life. Generally, there may be an impact of financial literacy on financial decision-making (Disney et al, 2015), because it is necessary to learn about finance in order to make the right financial decisions (Calcagno & Monticone, 2015) and invest the most effectively (Capuano & Ramsay, 2011), which helps accumulate their wealth (Jappelli & Padula, 2013;van Rooij et al, 2011;Lusardi & Mitchell, 2011).…”

Evaluating Financial Capability Services Provided in a Workforce Development Program

“…One option to help people with low financial literacy is to offer targeted financial counseling services (Disney, Gathergood, and Weber 2015;Xiao, Sorhaindo, and Thomas Garman 2006). Financial counselors provide clients with specific advice on financial issues in one-on-one sessions, frequently to people in crisis (Consumer Financial Protection Bureau 2016).…”