BORROW LESS TOMORROW:
A BEHA
APPROACH
TO DEBT
REDUCTION
A BEHAVIORAL
APPROACH
TO DEBT
REDUCTION
JONATHAN ZINMAN
(DARTMOUTH & IPA)
19 November 2010
First Annual Conference of the Financial Literacy Research Consortium
Washington, DC
Problem and Opportunity
pp
y

Low household savings rates

High debt loads and debt reliance in emergencies

Highest and safest return for many households: (accelerate) paydown of expensive debt
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
Potential Solution: Borrow Less Tomorrow (BoLT)
Borrow Less Tomorrow (BoLT)

Strategy: use behavioral economics principles to Strategy:
use behavioral economics principles to
facilitate paydown of expensive debt

Model: adapt Save More Tomorrow™
BoLT product
•
•
•
•
Help consumers identify (whether they have) a suitable debt to pay down quicker
to pay down quicker
Help consumers craft a repayment schedule Offer option of enlisting peer supporters/referees
Send reminders
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
Our Year 1 Project
j
“Test”

Test BoLT
BoLT’ss viability
Do suppliers want to offer it? Run well when they do?
Do borrowers want to use it when offered?
Test BoLT’s effectiveness (preliminary results)
Whether BoLT works
 To reduce debt loads
 To improve financial condition
Why BoLT works
Which features drive any change in outcomes?
Who benefits (more) from BoLT?
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT’s Viability: Supply Side
y pp y
 Are
Are suppliers interested in offering BoLT? Yes!
suppliers interested in offering BoLT? Yes!
 Even though we require randomized field testing part of the package!
 Year 1: Community Action Project (CAP) of Tulsa worked with IPA to offer BoLT to clients getting free tax preparation services
 Year 2: working to add several additional distribution channels
 “Retail” again through CAP, other human service agencies
 “Wholesale”
Wholesale through stickk.com
through stickk com
 “Wholesale” through credit counseling and coaching agencies
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT Viability: Operations Side
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 Supplier interest necessary, not sufficient, for reaching scale
Supplier interest necessary, not sufficient, for reaching scale
 To reach scale: can implement (cost‐)effectively? Tentative yes
 Can market cost‐effectively? Yes, natural add‐on to existing services for many suppliers
 Room for improvement; e.g., pre‐screening
 Can monitor whether someone on track with paydown schedule? Yes, using credit reports.
 Room for improvement; e.g., automation
Room for improvement; e g automation
 Can actually reach peer supporters when a BoLT client falls off track? Yes.
 Room for improvement; e.g., Room for improvement; e g “heads‐up”
heads up upfront
upfront
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT Viability: Demand Side
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 Are borrowers interested in using BoLT? Yes!
Are borrowers interested in using BoLT? Yes!
 20% take‐up rate among CAP’s tax prep clients  This is without doing any pre‐screening for Thi i ith t d i
i f
high‐interest debt
 50% take‐up rate for peer support
 Who
Who wants BoLT?
wants BoLT?
 Using baseline survey data to study take‐up decision
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT Plans
 61%
61% of takers use for a credit card
of takers use for a credit card
 Estimated mean interest rate: 17%
 Mean plan to accelerate repayment: > 100 months
 Too aggressive?
T
i ?
 39% of takers use for auto loan
 Estimated mean interest rate: 12%
 Mean plan to accelerate repayment: 27 months
 Too aggressive?
Too aggressive?
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT Performance
 After 6
After 6‐months,
months, 29% of BoLT
29% of BoLT users are on
users are on‐schedule
schedule
 59% of BoLT users stayed on‐schedule for >= one month
 Are these proportions low or high?  Depends on the counterfactual… what would Control Group balances look like?
Group balances look like?
 If difficult to pay down expensive debt then Control Group balances may remain high, while BoLT balances decrease (somewhat)
decrease (somewhat)
 Analogy to smoking: most quit attempts fail
 So… we implement BoLT with a Control Group for comparison!
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
BoLT Effectiveness: Preliminary 6 Month Results
Preliminary 6‐Month Results
 Method:
Method: randomized field test
randomized field test
 Offer BoLT on individually randomized basis to CAP clients
 Compare those offered BoLT to those not offered
 Outcomes: credit score, card and auto (change in) loan balances,
 Challenge for improving statistical power: constructing an account level control group match; i e which debt would the
account‐level control group match; i.e., which debt would the control group have chosen if they did BoLT?
 Preliminary: offered during 2010 tax prep, so only about 6‐months Preliminary: offered during 2010 tax prep so only about 6 months
elapsed so far
Res lts so far s ggest balances are declining
Results so far suggest balances are declining
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
Going Forward
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 Work out operational kinks, improve efficiency
p
p
y
 At greater scale
 Enrich, extend analysis on Year 1 sample
 Add to sample for credit cards and auto loans
 Improve statistical power for measuring impacts and mechanisms
 Test different features
Test different features
 Test for heterogeneity in impacts
 Feasible to extend coverage to borrowing not covered by traditional credit bureaus?
traditional credit bureaus?
 Bank overdraft fees, payday loans, etc.
Use results to refine product marketing, design, and implementation
Borrow Less Tomorrow: A Behavioral Approach to Debt Reduction
19 November 2010
THANK YOU!
jonathan.zinman@dartmouth.edu
IPA Household Finance and Behavioral Economics Programs:
B k B
Brooke Berman: bberman@poverty‐action.org
bb
@
i
Rebecca Rouse: rrouse@poverty‐action.org