Credit Counseling and Consumer Credit Trajectories

Abstract

Nonprofit credit counseling provides consumers with financial education, individualized financial counseling, and debt restructuring. Despite potential benefits, relatively little is known about its efficacy. This study uses administrative data to assess the relationship between counseling and consumer credit outcomes. We estimate difference‐in‐difference models to analyze credit outcomes for a counseled group relative to a matched comparison group for six quarters after a baseline period. We find evidence of a substantial credit shock around the time of counseling. Post‐treatment, counseling is associated with a persistent reduction in debt even after accounting for bankruptcies, foreclosures, debt charge‐offs, or participation in debt consolidation programs. (JEL D12)

The Hayne Royal Commission and Financial Planning Advice: A Review of the Impact on the Operating Model of Financial Advice Firms

“…Studies on the effects of counselling services on debts have established positive effects of counselling and can be seen a precursor to this study (Brackertz, 2012). Research has shown counselling services such as financial education, budget counselling, debt management plans (DMP) and bankruptcy referrals have improved financial behaviours of people with debt problems (Roll and Moulton, 2019). Delegating management of financial decisions is arguably effective in setting realistic financial goals and achieving them.…”

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“…Cadena and Schoar (2011) found that sending text messages to microloan borrowers in Uganda reminding them to repay their loans was as effective at reducing loan delinquency as a 25 percent reduction in the loan's interest rate. Roll and Moulton (2019) found that automated reminders sent to credit counseling consumers in the United States both improved credit scores and reduced the likelihood of incurring debt payment delinquencies.…”