Income Volatility, Unemployment, and Financial Wellbeing: Understanding the Role of Credit Counseling

• In Event: Beyond the Score: Innovative Approaches to Consumer Debt, Creditworthiness, and Financial Resilience

Abstract

Nonprofit credit counseling organizations, which have been active since the 1950s, provide a critical service to households facing financial challenges. These services include financial education, budget counseling, and the implementation of debt management plans (DMPs), which offer an alternative to bankruptcy. By working with creditors to reduce interest rates and fees, DMPs provide a structured plan to repay consumer debt within three to five years. However, about half of consumers drop out of DMPs within the first six months due to various factors, including unemployment and income fluctuations. Understanding the role of DMPs for those affected by unemployment and income volatility is imperative for improving the financial stability of consumers. This research seeks to advance this understanding by (1) documenting the income histories of consumers seeking credit counseling, including the prevalence of income and expense shocks prior to and after the time of counseling; (2) estimating the relationship between income volatility before counseling and subsequent indicators of long-term financial wellbeing among individuals enrolled in DMP; and (3) similarly, examining whether enrollment in a DMP moderates the effect of income volatility before counseling on indicators of long-term financial health among all counseled consumers.

We construct a novel panel dataset for this study that combines administrative records of nearly 50,000 consumers counseled by eight credit counseling agencies in Ohio between January 1, 2018 and September 31, 2021. Data include individual-level, quarterly credit panel data and individual-level, quarterly wage and unemployment insurance claims data between 2014 and 2023. Specifically, we link the Ohio counseled consumers and their household members to person-level employment data from the Ohio Department of Job and Family Services, collected and maintained by OSU’s Center for Human Resources Research as part of the Ohio Longitudinal Data Archive (OLDA). The OLDA dataset includes quarterly data on total wages earned, weeks worked, and anonymized employer information, as well as quarterly data on unemployment insurance claims. Using these data, we first describe prior trends in income, employment, and credit for Ohio workers who sought credit counseling between January 1, 2018 and December 31, 2021. We then employ quasi-experimental research designs to estimate the relationship between credit counseling, enrollment in debt management plans, and longer-term financial well-being for consumers with varying income histories in the two years prior to seeking counseling. Specifically, we explore variation in financial outcomes based on a prior history of household income stability or instability, including the depth and duration of income or employment shocks, the time between experiencing a shock and seeking counseling, and the amount of and changes in consumer debt (including credit card debt) prior to seeking counseling. This study is the first to our knowledge to incorporate data on wages and income volatility in an analysis of credit counseling for distressed consumers. The findings from our study thus significantly expand the empirical literature on credit counseling and policy interventions to assist consumers burdened by financial debt.

Author

• Rebecca F Xie, The Ohio State University
  Presenting Author