Association for Public Policy Analysis & Management

Nonprofit credit counseling agencies have existed in the United States for over fifty years and provide services to around two million people annually. These agencies typically target individuals going through an unexpected financial shock or who are looking to resolve general credit-related difficulties. Services include individualized budget counseling, financial education, and enrollment in debt management plans (DMPs). In providing these services, credit counseling agencies have the potential to address public issues regarding financial behaviors and financial welfare. Financial education, individual financial management skills, and consumer debt have emerged as issues of national concern, evidenced in part by the creation of the Consumer Financial Protection Bureau and the Office of Financial Education.

Despite the purported individual and public benefits of receiving counseling, relatively little is known about credit counseling’s impact on consumer outcomes. To date, there has only been one systematic evaluation of credit counseling (Elliehausen, Lundquist, & Staten, 2007). To address the substantial gap in research on credit counseling services, this analysis leverages data on more than 6,000 clients completing credit counseling through a national demonstration program. To assess counterfactual outcomes, a matched comparison group of non-counseled individuals is generated through Coarsened Exact Matching (CEM); counseling clients and comparison group individuals are matched on ten separate indicators including credit scores, debt metrics, account histories, bankruptcy history, and the state of residence. In total, 6,094 counseling clients are matched with 6,005 non-counseled individuals.

To assess the treatment effect of receiving credit counseling, we estimate a series of fixed effects panel regression models to trace the evolution of credit outcomes for the counseling group relative to the matched comparison group—a differences-in-differences approach. Outcomes are measured quarterly from the pre-counseling period to 18 months post-counseling. We also estimate models controlling for post-counseling bankruptcies, charge-offs, and foreclosures. Further, we trace outcomes separately based on client DMP enrollment.  

The results indicate that counseling clients enter the counseling program at times of substantial financial distress, indicated by higher rates of account delinquencies and declines in credit scores around the time of counseling. After the initial decline in credit outcomes, clients’ credit scores and debt payment behaviors return to their pre-counseling levels about one year after counseling and begin to exceed their pre-counseling levels by the end of the evaluation period. However, the credit scores for counseling clients lag behind the comparison group by seven points (p<0.01) 18 months after counseling.

Relative to the comparison group, counseling clients make significant reductions in their debt balances after counseling. Specifically, counseling clients reduce their total debt by around $11,300 (p<0.01) and their revolving debt by around $3,600 (p<0.01) compared to non-counseled individuals. These reductions hold even when accounting for client bankruptcies, foreclosures, debt charge-offs, or participation in a debt management plan (DMP). Further, clients’ available credit (as a percent of their revolving credit limit) increases post-counseling at a significantly higher rate than for the comparison group, indicative of improved borrowing capacity. The implications of these findings for both research and policy are discussed.