Poster Paper: Effectiveness of Credit Building Efforts In IDA Programming: Early Results

Friday, November 9, 2012
Liberty A & B (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Julie Birkenmaier and Jami Curley, Saint Louis University

Using empirical data, this presentation explores the effectiveness of credit building components of the Individual Development Account (IDA) program.  Credit is central to the success of asset development efforts, such as the Individual Development Account (IDA) program.  Many assets purchased through IDA programs are expensive enough to require borrowed money (Huang, 2010; United States Department of Health and Human Services, 2010).  Therefore, credit history and score, an indicator of risk of non-repayment, is crucial to the success of asset purchase and long-term ownership.  Lenders use credit history and score in their decisions to set the pricing and terms of borrowed funds (Loonin, 2010). Many low-income families, including IDA participants, struggle with low credit scores, and most IDA programs provide assistance to participants to improve their credit histories, save, and gain access to appropriate financial products (Beverly, Sherraden, Cramer, Shanks, Nam, & Zhan, 2008; Mills, Lam, DeMarco, Rodger, & Kaul, 2008; Pinder, Yagely, Peck, & Moore, 2006). Most IDA programs require and provide group and/or individual general financial education, as well as credit counseling (United States Department of Health and Human Services, 2010) to assist participants to gain needed financial education and improve their credit. Therefore, review of participant credit history and score has become institutionalized within IDA programs (Birkenmaier & Tyuse, 2005; Johnson, 2004; Johnson, 2004; Mills et al., 2000; Pinder et al., 2006). 

The improvement of financial credit is essential to both prepare participants for IDA participation and to use credit for their future IDA asset purchase (Carpender, 2008; Johnson, 2004; Mills et al., 2000; Pinder et al., 2006). Beyond screening and educating, programs are focusing on credit in a variety of ways, to include:  1) allowing IDA funds to be used for paying off debt to increase credit scores (Mills et al., 2000; Pinder et al., 2006); 2) providing referrals to or having partnerships with lending institutions and credit counselors to deliver credit counseling (Carpender, 2008; Johnson, 2004; Mills et al., 2000; Mills et al., 2008; Pinder et al., 2006); and 3) gathering information about the fees associated with and the rates set on loans used for IDA purchases (Hendricks, 2005; United States General Accountability Office, 2004).  Despite these efforts, current research has demonstrated no significant difference with regard to credit card debt (Loibl, Grinstein-Weiss, Zhan, & Red Bird, 2010) or in the credit scores of participants after program participation (Loibl & Red Bird, 2009), raising questions about the effectiveness of the financial education and credit building aspects of IDA programming.

This presentation will report on the effectiveness of credit building work within IDA programming. Using a convenience sample of IDA participants (N = 165), this presentation will provide Year One findings of a longitudinal, four-year study of participant credit within an IDA program. Findings include a significant increase in the mean credit score and the number of positive elements of credit history for program participants and completers.  Implications of the results to asset development policy and practice effectiveness will be discussed.