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Credit Counseling Can Lead to Significant Debt Reduction

Credit Counseling Can Lead to Significant Debt Reduction

People who take advantage of nonprofit credit counseling services have statistically significant reductions in consumer debt, according to a study from the Brown School at Washington University in St. Louis.

“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,” said Stephen Roll, PhD, research assistant professor and co-author of “Credit Counseling and Consumer Credit Trajectories,” published in the journal Economic Inquiry.

Eighteen months after credit counseling, the counseled group reduced their revolving debt by an average of $3,637 and reduced their total debt by $11,341.

“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 said.

The paper is an evaluation of the National Foundation for Credit Counseling’s “Sharpen Your Financial Focus” program, which was a standardized counseling program offered at 70 different credit counseling agencies.

Using data on 6,094 consumers, Roll and co-author Stephanie Moulton, PhD, 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.

“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 said. “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 said.

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.

Even as credit counseling recipients experience substantial distress around the time of enrollment, credit counseling 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 said. “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 article was adapted from information provided by Washington University in St. Louis.

 IMAGE: Africa Studio/stock.adobe.com

 

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