Effects of Credit Counseling and Debt Management on Financial Stressors and Financial
Assistant Professor and Extension Specialist
Department of Family Studies, University of Maryland
E. Thomas Garman
Fellow and Professor Emeritus
Virginia Polytechnic Institute and State University
Director of Research, InCharge® Education Foundation
We wish to express appreciation to the InCharge® Education Foundation and the InCharge
Institute of America for their cooperation and support of this study.
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Participation in credit counseling reduces financial stressors and increases positive financial
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Positive financial management behaviors include reducing personal debts and living expenses,
following a budget, developing a financial plan, and increasing savings.
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The alternatives for financially troubled consumers are personal finance education and advice on
credit and budgeting.
Many Americans who experience difficulty repaying what they owe seek assistance from
nonprofit credit counseling agencies to help manage their debts. This study examined the effects
of credit counseling and debt management on financial management behaviors and financially
stressful events. Consumers who continued in a debt management program for 18 months
reported improved financial management behaviors and experienced fewer stressful events than
consumers who did not remain in the program.
In 2003 more than 1.6 million people declared bankruptcy (American Bankruptcy Institute,
2004), and in the previous year about 9 million sought the advice of credit agencies regarding
management of their money (Bayot, 2003; Loonin & Plunkett, 2003). Overspending and
excessive credit usage prompt many people to seek credit counseling and/or declare bankruptcy,
but millions encounter financial difficulties because of unemployment, loss of overtime, bills for
uninsured medical services, and marital separation or divorce (Sullivan, Warren, & Westbrook,
2000). Consumers contact credit counseling agencies to control their debts.
A debtor could benefit if the credit counseling agency could negotiate with the person’s
creditors to lower interest rates and eliminate other penalty fees by putting the person on a debt
management program (DMP) (Bayot, 2003). A DMP is a creditor-approved arrangement that
provides an individual with a plan for paying off his or her unsecured debts by consolidating
those debts into one monthly payment disbursed to creditors. However, a DMP is not appropriate
for all consumers with debt problems. Also, usually it takes consumers 3 to 5 years to pay off
their debts on a DMP, and many drop out of these programs (Bagwell, 2000; Consumer Reports,
2001). Furthermore, there have been criticisms leveled at the industry for alleged abusive
business practices and profiteering (Loonin & Plunkett, 2003; U.S. Senate, 2004).
Despite these recent criticisms, little is known about credit counseling clients. The
commonly available information is limited to clients’ anecdotal testimonials. The purpose of this
study was to explore the effects of credit counseling and debt management on financial
management over an 18-month time period.
Typically, credit counseling agencies provide consumers with income, debt, and expense
analyses via telephone or face-to-face conversations ranging from 15 minutes to an hour or more
in duration. For consumers who qualify, a DMP often is recommended.
Revenues to operate a credit counseling company come from two sources. First, clients
typically are assessed setup and monthly process fees. The second source is “fair-share
contributions” from creditors. Today, most creditors have reduced their fair-share contributions,
on average, from 15% to 8% (Loonin & Plunkett, 2003). Therefore, credit counseling agencies
have increased fees charged to consumers, and some have reduced their education and
Although the credit counseling industry has expanded greatly over the past decade,
limited research has been published about clients. Not all credit counseling clients are successful.
According to the agency statistics and client profile of the National Foundation for Credit
Counseling (NFCC, previously the National Foundation for Consumer Credit), 273,473 DMPs
terminated in 2002; among these clients, almost half (47%) simply stopped paying, 4% declared
bankruptcy, 21% decided to self-administer their own repayment plan, and 21% successfully
completed the plan (NFCC, 2003).
A few studies have shown that credit counseling has positive effects. Staten, Elliehausen,
and Lundquist (2002) focused on credit counseling clients who received only budgeting and
counseling advice. Data from credit reports were collected 3 years after clients’ initial budgeting
and counseling sessions. Counseled borrowers had significantly fewer credit accounts, less total
debt, and fewer credit delinquencies than other similarly situated borrowers.
It has been shown that consumers with credit problems experience an extremely high
level of stress (Bagwell, 2000). Bagwell (2000) conducted a study of 332 credit counseling
clients who underwent only an initial session of face-to-face or telephone credit counseling.
Results showed that, 1 year after this initial session, respondents reported decreases in personal
financial stress. Also, 87% had reduced some of their personal debts, 78.1% had cut down on
living expenses, and 57.9% had followed a budget or spending plan.
Accumulation of financially stressful events such as receiving calls from creditors and
collection agencies could further affect the financial strain of credit counseling clients (Bagwell,
2000; Kim, Garman, & Sorhaindo, 2003). However, little is known about the impact of credit
counseling on personal financial management behaviors or financially stressful events.
HYPOTHESIS AND METHODOLOGY
It was hypothesized that, after 18 months in the DMP of a credit counseling agency, a sample of
active clients would report better financial management behaviors and fewer financially stressful
events than a similarly situated group that did not remain with the program.
The data for this study came from a large nonprofit credit counseling agency that provides
telephone counseling services. Data collection occurred twice. Initial data weres collectedin
June 2000. A random sample of 1,800 was drawn from a population of 4,000 new clients who
called and committed to a debt management plan with the credit counseling organization. About
20% (n = 355) returned the first survey. Follow-up data were collected 18 months later, in
January 2002. Surveys were sent to the 355 individuals who responded to the earlier survey. A
total of 175 returned surveys were usable in the final data analysis (57.7% usable response rate).
This study was approved by the University of Maryland Institutional Review Board.
Individuals who responded to both data collections were included in the analysis. Questionnaires
from the two data collections were matched via client identification numbers. Of the 175 people
in the final data analysis, 71 (40.6%) remained in the debt management plan (“active clients”)
and 104 (59.4%) did not (“inactive”). As a result of missing information, sample size varied
slightly for data analysis purposes.
The respondents were primarily female (68.0%) and White (65%); 16.8% were African
American. Slightly more than half were married (52%), whereas 12.6% were living with a
partner and 35.9% were not married. Education achievement varied; 37.7% had completed high
school, 23.4% had attended some college, and 25.7% held a bachelor’s degree or higher. A total
of 82% were employed full or part time, and the median household annual income range was
$30,001 to $40,000.
Financial Management Behaviors. Responses were coded as 1 (yes) or 0 (no). Nine items (see
Table 1) were summed to create a financial behavior score. Cronbach alpha coefficients for these
nine items were .73 in the first data collection and .65 in the second. The corresponding mean
scores were 3.85 and 4.66.
Financially Stressful Events. This variable was conceptualized as events having the
potential to cause change and raise an individual’s level of financial stress (Bagwell, 2000).
Respondents were asked whether they had experienced any of a list of 12 events (see Table 2).
Responses were coded as 0 (never) or 1 (once or more than once). Again, items were summed to
provide a financial stress score. Cronbach alpha coefficients were .74 in the first data collection
and .85 in the second, and corresponding mean scores were 7.54 and 5.24.
Credit Counseling. Active clients were defined as those who made payments based on the
debt management plan approved by creditors and who remained in the program for the entire 18
months. Those considered inactive contacted the credit counseling company and then either
never submitted their first payment or dropped out of the program within 18 months. Both active
and inactive participants completed a 15–50-minute telephone counseling session focusing on
income, debts, and expenses. Only the active group received follow-up telephone calls and
bimonthly newsletters. Also, members of this group were encouraged to access and use online
Covariates. To compare data controlling for the effects of age and family income, these
variables were used as covariates.
Individual characteristics of the two groups were compared via t tests and chi-square statistics.
With the exception of household income and age, there were no significant differences in
demographic characteristics between the two groups. On average, members of the active group
had slightly higher family incomes and were about 4 years older than inactive group members.
Tables 1 and 2 presentpaired t-test results. Both groups showed improvements in
financial management behaviors and experienced fewer stressful events, although the active
group exhibited greater change than the inactive group. The t values for the active group were
higher than those for the inactive group; however, independent t tests showed that the active
group also had slightly better financial management behaviors and slightly fewer financially
stressful events than the inactive group in the initial assessment.
An analysis of covariance was conducted to determine whether there were any significant
differences in the financial management behaviors and stressful event postintervention scores
between the active and inactive groups controlling for initial scores, age, and family income.
After 18 months, active clients exhibited significantly more improvement in their financial
management behaviors (F = 13.85, p < .001) and experienced fewer financially stressful events
(F = 7.02, p < .001) than inactive clients, controlling for initial scores, age, and family income.
Self-reported data showed that people who received credit counseling and participated in a DMP
exhibited greater reductions in financially stressful events and improvements in positive financial
management behaviors, after control for initial scores, age, and family income, than a similar
group that either never participated in the program or dropped out before 18 months. These
results are consistent with previous studies (Bagwell, 2000; Staten et al., 2002). However, this
study is unique in that it compared preassessments and postassessments among those who stayed
and did not remain with the credit counseling program.
This study involves some limitations. For example, at the preassessment, the active and
inactive groups were slightly different in regard to financial management behaviors and
existence of financially stressful events. It is possible that those who were initially in a slightly
better personal financial situation (on these two criteria) chose to remain with the credit
counseling agency. There was no random assignment for treatment. The low response rate in the
initial survey (20%) is another limitation.
This study adds evidence that credit counseling and a debt management plan have
positive effects on personal finances. The results also showed that financial management
practices and preassessment stressful event scores were significant in predicting 18-month scores.
One explanation could be that it was too late for some overly indebted people to make progress
in their personal finances. Those who are in deep financial trouble may not see improvement in
the relatively short period of 18 months.
APPLICATIONS AND CONCLUSIONS
There are limited sources of assistance for the millions of individuals and families who struggle
with managing their monthly bills and other debts. Effective financial education programs could
increase financial literacy and help prevent financial strain; however, many people do not have
access to such programs. Although family and consumer sciences programs offered in high
schools and colleges emphasize personal finance topics, relatively few students take these classes.
This study offers evidence that counseling and debt management plans reduce financial
stressors and increase positive financial behaviors. Positive effects also may result from a credit
counseling and budgeting session only (Staten et al., 2002). As family and consumer sciences
professionals encounter more financially troubled individuals and families, it is important to
understand different available options. Not all financially troubled individuals and families can
benefit from credit counseling and a DMP, but improving financial management behaviors and
reducing financial stress may help them control debt levels. Typical successful debt management
plan clients stay in the program for 3 to 5 years to repay their liabilities (Bagwell, 2000). It is
important for individuals and families to retain their improved financial management behaviors
for the long term if they want to avoid a similar financial situation in the future.
Professionals such as extension experts, educators, student aid advisors, military financial
counselors, pastoral counselors, and attorneys are involved in advising overly indebted and
financially distressed consumers. Given the evidence from this study, credit counseling appears
to be a viable and useful source of assistance for those with debt problems. However, individuals
and families are advised to seek such assistance before their financial condition becomes so dire
that education, advice, or a DMP will be of little value and their only recourse may be to seek the
counsel of a bankruptcy attorney.
American Bankruptcy Institute. (2004). U.S. bankruptcy filings 1980–2003 (business, non-
business, total). Retrieved October 14, 2004, from
Bagwell, D. C. (2000). Work and personal financial outcomes of credit counseling clients.
Unpublished doctoral dissertation, Virginia Polytechnic Institute and State University.
Bayot, J. (2003). Not-for-profit credit counselors are targets of an I.R.S. inquiry.
New York Times. Retrieved October 20, 2003, from http:// www.nytimes.com
Consumer Reports. (2001). Pushed off the financial cliff. Retrieved June 26, 2001, from
Kim, J., Garman, E. T., & Sorhaindo, B. (2003). Relationships among credit counseling clients’
financial well-being, financial behaviors, financial stressor events, and health. Financial
Counseling and Planning, 14(2), 75–87.
Loonin, D., & Plunkett, T. (2003). Credit counseling in crisis: The impact on consumers
of funding cuts, higher fees and aggressive new market entrants. Retrieved March 2, 2004,
National Foundation for Credit Counseling. (2003). Credit counseling industry issues
andimpacts. Retrieved February 10, 2004, from http:www.nfcc.org
Staten, M. S., Elliehausen, G., & Lundquist, E. C. (2002). The impact of credit counseling on
subsequent borrower credit usage and payment behavior (Monograph 36).Washington,
DC: Georgetown University, Credit Research Center.
Sullivan, T. A., Warren, E., & Westbrook, J. L. (2000). The fragile middle class: Americans in
debt. New Haven, CT: Yale University Press.
U.S. Senate Committee on Governmental Affairs. (2004). Profiteering in a non-profit
industry: Abusive practices in credit counseling. Retrieved April 1, 2004,
Table 1. Financial Management Behaviors
INACTIVE (n = ACTIVE (n = 68)
PRE (%) POST PRE POST
BEHAVIOR (%) (%) (%)
Developed a plan for financial future 40.4 54.9 47.9 71.4
Started or increased savings 30.8 48.0 42.3 54.3
Reduced personal debts 74.1 71.8 81.7 94.4
Followed a budget or spending plan 39.5 55.4 66.2 80.0
Reduced living expenses 70.2 79.4 80.3 78.9
Contacted a financial planner 36.6 20.8 39.4 14.3
Participated in and contributed money to a
pretax dependent/health care program
14.5 23.3 16.9 30.4
Tried to determine how much will be needed
to live comfortably in retirement 21.2 28.2 26.8 51.4
Contributed to employer’s retirement plan
27.9 35.9 36.6 58.6
Total financial management score 3.60 4.21 4.33 5.32
ta (p) 2.26 (.04) 3.24 (.002)
From paired t test.
Table 2. Financially Stressful Events
INACTIVE (n = ACTIVE (n = 66)
PRE POST PRE POST
EVENT (%) (%) (%) (%)
Received an overdue notice from a creditor 97.1 82.0 85.9 43.5
Paid one or more utility bills late 77.9 66.0 62.0 55.1
Paid a credit card bill late 81.7 66.0 80.3 39.4
Incurred a late payment fee 86.5 81.0 85.9 54.4
Received a phone call from a creditor about a
past due bill 88.5 67.0 67.6 33.3
Received a call from a collection agency about
an overdue bill 67.3 56.0 36.6 14.5
Made a late vehicle loan/lease payment 44.2 36.7 32.4 21.7
Paid rent/mortgage late 42.3 37.4 28.2 18.8
Reached the maximum limit on a credit card 78.8 61.0 73.2 30.9
Took a cash advance on a credit card 56.7 40.0 54.9 16.2
Used a cash credit card advance to pay amount
due on another card 27.9 11.1 31.0 4.4
Bounced a check 51.9 40.4 47.9 31.9
Total financial stress event score 8.07 6.38 6.80 3.58
ta (p) 4.79 (.000) 8.55 (.000)
From paired t test.