The Effects of Credit Counseling on Financial Stressors, Behaviors and Well-being

1. The Effects of Credit Counseling on Financial Stressors, Behaviors and Well-being Benoit Sorhaindo, InCharge Institute of America E. Thomas Garman, Professor Emeritus, Virginia Tech Jinhee Kim, University of Maryland Presented to the Annual Meeting of the Association of Financial Counseling and Planning Education Savannah, GA November 21, 2003

2. Current Situation 9 millions contact credit counseling counseling (2003). Credit counseling and debt management are popular strategies to address consumer debt problems. Anecdotal evidence exists suggesting credit counseling is effective.

3. Credit Counseling Under Scrutiny • Bayout, 2003 • Credit Counseling in Crisis, 2003 • Gardner, Fall 2001/Winter 2002 • Lander, 2002 • Mayer, 2001 • Pushed Off the Financial Cliff, 2001 • Schmitt, Timmons & Cady, 2001 • Simpson, 2002 • Weston, 2001

4. Industry Criticisms • Aggressive advertising practices • High set-up and maintenance fees • So-called voluntary fees • Speedy payments to creditors • Arrangements with profit-making businesses • Counseling agency executive salaries

5. Impact of Credit CounselingSome Findings • Credit counseling clients experience a high degree of stress about financial matters (Garman, Camp, Kim, Bagwell, Redican & Baffi, 1999). • Credit counseling clients instituted positive financial behaviors after one year(Bagwell, 2000). • Credit counseling session (without debt management plan) affected later credit use and payment behavior in positive ways (Staten, Elliehasen, & Lundquist, 2002).

6. Credit Counseling with DMP • Little research published on the effectiveness of a debt management plan (DMP) on financial stressors, behaviors and perceived financial well-being.

7. Study Objectives Measure impacts of Credit Counseling with a DMP on: • Reducing incidence of financial stressors • Promoting good financial behaviors • Improving perceived financial well-being

8. Industry Working Hypothesis Financial Well-being + Behaviors Stressors + - Credit Counseling

9. Methodology • Two mail surveys to clients of a national non-profit credit counseling organization. • First survey • In 2000, a random sample of 1,800 was drawn from a population of 4,000 current clients. • 20% response rate (n=355) • Second survey • In 2002 (18 months later), 355 people who responded initially received a second questionnaire (43 undeliverable). • 57.7% usable response rate (n=175) • DMP, control, and dropout three groups

10. Demographics • People who responded to both surveys were included in data analysis (n=175). • 68% were female. • The mean age was 37 years. • 49% were either married or living with a partner • Annual median income was between $30,001 to $40,000. • The educational attainment varied. • 42.9% had a high school education • 27.6% had some college • 29.5% had a bachelor’s degree or higher

11. Measures • Financial behaviors • Nine items with each constituting a positive accomplishment (e.g. “followed budget,” “reduced debts,” “developed a plan for my financial future”). • Financial stressor events • Twenty-three signals and symptoms of financial distress (e.g. “received overdue notice from creditor,” “paid rent/mortgage late”). • Perceived financial well-being • Current financial situation with overwhelming (1), some difficulties (2), doing okay (3), and it is easy to save (4).

12. Measures continued • Credit counseling client status • Active (1) Inactive (0) • Inactive • Never made a payment  Control • Made at least one payment  Dropout

13. Financial Well-beingHow do you feel about your current financial situation? • In the 18 months between June 2000 and Jan 2001 active clients reported that they were still doing better financially and had widened the margin between the control and dropout groups.

14. Financial Well-being

15. Credit Counseling Positively Impacts Financial Behaviors • Credit counseling improved behaviors in a statistically significant way. • A greater proportion of active clients improved financial behaviors than those who dropped out of the program. • Consistent with previous research (Staten et al, 2002).

16. Financial Behavior Proportion responding YES in 2000

17. Financial Behavior Proportion responding YES in 2002

18. Financial Behavior 18-month changes

19. Financial Behavior Significant changes

20. Credit Counseling Reduces Financial Stressor events • Credit counseling reduces stressors events in a significant way. • The number of stressors dropped significantly after 18 months. • Consistent with Bagwell (2000).

21. Financial Stress: Proportion responding YES in 2000

22. Financial Stress: Proportion responding YES in 2002

23. Financial Stress declines

24. Financial Stress declines significantly

25. Research Findings Financial Well-being + Behaviors Stressors + - Credit Counseling

26. Limitations of Study • Low response rate • High attrition rate • Limited to a small sample • Limited variables

27. Conclusions“After 18 Months…” • Perceived Financial Well-being - Active clients appear to be better off financially than dropouts and those who never joined program. • Financial Behaviors - Active clients improved more. • Financial Stressor Events – Active had higher percentage reduction in stressor events, including a 90% reduction in “using cash advances to pay another credit card.”

28. Conclusions • Being in a debt management program for 18 months reduces one’s anxiety about debts. • In addition, it helps get consumers on the right track to perform financial behaviors that bring personal success, less anxiety and very likely increases in happiness. • A debt management program improves clients’ personal financial well-being.

29. Research Recommendations • Replicate study using other samples. • Conduct similar research using shorter time frames, such as 3 months, 6 months. • Conduct research using large sample over many years. • Investigate the effectiveness of different credit counseling and DMP delivery methods. • Create measures to easily assess personal financial well-being that could be used by the credit counseling industry, psychological counselors and other professionals.

30. Recommendations for Credit Counseling Industry • Industry should inform consumers that these findings support the claim that credit counseling works. • Industry should continue offering credit counseling and DMP programs to overly indebted consumers.

31. Recommendations for Credit Counseling Industry • Industry should attempt to attract consumers who are financially over-indebted before they are in such a bad way that bankruptcy is their only logical alternative. • Dropouts are most likely to be those who are in very poor financial situations, thus the industry should direct those people to seek bankruptcy legal counsel.

32. Recommendations for Credit Counseling Industry • Industry should endeavor to retain clients in DMP programs to help move clients toward better financial lives. • Regular outbound communications to clients could be helpful. • Provide more access to budgeting forms as well as information and education on credit, money management and how to achieve financial success.

33. Thanks!Contact Information: • Benoit Sorhaindo, InCharge Institute of America, 1767 Park Center Drive, Orlando, FL 32835; bsorhain@incharge.org; Phone: 407-532-5704; Web: www.InCharge.org; www.InCharge.Education.org. • E. Thomas Garman, Advisor and Author, 8044 Rural Retreat Court, Orlando, FL 32819; tgarman@bellsouth.net; Phone: 407-363-9048; Web: www.EThomasGarman.net • Jinhee Kim, University of Maryland, 1204 Marie Mount Hall, College Park, MD 20742; jinkim@umd.edu; Phone: 301-405-3500