DMP Participation and Credit Counseling Outcomes
financial education program components, financial coaching and counseling, financial education program outcomes, financial status, financial behavior
This paper reports on the final phase of a multi-year project to identify the aspects of a credit counseling experience, if any, that lead to longer-term improvements in consumer credit profiles and credit usage behavior. The paper analyzes the experience of 29,000 clients who were counseled by five non-profit counseling agencies in 2007. Among the 45% of clients who were recommended for a Debt Management Plan (DMP), it is clear that the decision to start a DMP is linked to significant credit score improvement and reduced likelihood of bankruptcy. That is, between two clients for whom the counselor has judged that a DMP is both a workable option and the best option, the client who actually starts payments in a DMP fares significantly better over a three year period in terms of credit score and reduced incidence of bankruptcy. A statistical procedure to control for client self-selection reinforces the finding that it is the DMP experience and not selection that drives the result. Much of the improvement in scores for DMP participants is attributable to debt repayment during the course of the DMP. That is, the longer the client sticks with the DMP payment program, the greater is the pay-down of debt and the greater the corresponding improvement in credit score. Larger reductions in the interest rate offered to clients who agree to a DMP also increase time on plan and the amount of debt repaid. The rationale is straightforward. The interest rate reduction associated with the DMP program is the incentive for clients to start and stick with a monthly repayment plan. The larger the reduction, the greater is the incentive.