The Consumer Federation of America (CFA) and the American Express Company release phase one findings on consumer credit counseling effectiveness.

Undertaken by the Georgetown University Credit Research Center, the report was comprised of data supplied by ten leading consumer credit counseling agencies.

Due to recent government legislation, consumers must now undergo credit counseling prior to filing bankruptcy. This has created a surge of activity for credit counseling agencies, as well as closer government scrutiny. Recently, the IRS revoked the non-profit status of dozens of counseling agencies, and more are expected.

Because of the new government law, CFA and American Express are exploring what aspects of counseling programs are most effective in reducing consumer credit risk (as measured by changes in credit scores). In the first phase of the research, ten participating agencies supplied archived data on nearly 60,000 of their clients who were counseled during 2003 to the national credit reporting agency TransUnion.* The objectives for this phase of the research included an analysis of client credit profiles and history at a point two years following their counseling session to determine the impact of the counseling delivery method (in-person and telephone) on client outcomes.

The findings of the first year's research are broad but tentative, and point to areas where additional research will be beneficial to better understand more detailed components of credit counseling's impact. As the study focuses on the experience of consumers at ten agencies that emphasize client education, the results may not reflect the average experience of agency clients across the country. "This represents the most thorough research on the topic, yet was limited by the characteristics of data collected by agencies in the past," said principal researcher Dr. Michael Staten. "In phase two of the research, the agencies will be collecting data on an array of new, more specific variables related to program features and client characteristics," he added.

The first phase of research is described in an accompanying report prepared by Dr. Staten. Three of the more interesting preliminary findings are summarized below.

The act of seeking counseling is a valuable "early warning" indicator of serious financial trouble that facilitates timely intervention and assistance. Credit bureau information available at the time of counseling often does not reflect private information that many counseled clients possess regarding recent or impending negative changes to their financial condition.

Telephone and face-to-face delivery of the initial counseling appear to generate equivalent outcomes for consumers' creditworthiness measured two years later. This is true both for clients who complete only an initial counseling session and those who enter debt management programs (DMPs).

The creditworthiness of consumers who participated in DMPs improved. Consumers who were recommended for a DMP by agencies and chose to start payments had a significantly lower incidence of bankruptcy, as well as improved bankruptcy and delinquency risk scores, over the two years following counseling than did those who were recommended for a DMP and chose not to start.

The agencies that are participating in the study include: Auriton Solutions of Roseville, Minnesota; ClearPoint Financial Solutions, Inc. of Richmond, Virginia; Consumer Credit Counseling Service of Greater Atlanta, Inc.; Consumer Credit Counseling Service of Los Angeles; Consumer Credit Counseling Service of Montana; Consumer Credit Counseling Service of North Central Texas, Inc.; InCharge Debt Solutions of Orlando, Florida; LSS Financial Counseling Service of Duluth, Minnesota; Novadebt of Freehold, New Jersey; and Money Management International of Houston, Texas.

Consumer Federation of America (CFA) is a non-profit association of some 300 pro-consumer groups that was founded in 1968 to advance the consumer interest through research, education, and advocacy. More information can be found at www.consumerfed.org.

The full consumer credit report can be found at msb.georgetown.edu/faculty/research/credit_research/

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