Education Benefits Borrowers, Prevents Trouble, Study Shows

MBA (2/27/2008 ) Palaparty, Vijay
Financial literacy—or lack thereof—has come front and center as organizations attempt to address growing financial problems, particularly among borrowers of mortgages. A study from the Community Development Corp. of Long Island reports that financial education has strong potential to improve credit and savings and increase financial knowledge.
“Financial education is a critical need for consumers in our community to maximize wealth building opportunities and prevent them from falling into traps that eventually lead to financial ruin,” said CDC President Marianne Garvin. “Financial education can also help potential homeowners become more aware of common pitfalls, including consumer scams and predatory lending practices and how to avoid them.”

The study focused on very-low income and highly credit-distressed individuals with average household incomes under $20,000 and those who, at the beginning of the study, had FICO scores averaging 570. Additionally, participants had on average $500 in savings and more than $10,000 in debt. These individuals, chosen a random, were enrolled in the CDC Financial Fitness, Health & Wealth program, a financial training program that teaches Long Island residents money management skills.

One year into the program, on average, participants experienced an increase in savings of at least $450, a 21-point decrease in credit scores, a 45 percent decrease in reaching the maximum allowable balance on a credit card, a 39 percent increase in their ability to follow a budget, a 74 percent increase in their ability to plan their financial future and a 25 percent increase in understanding credit management and budgeting.

“The documented effectiveness of financial education may encourage government and private industry funders to provide more resources for these programs,” Garvin said. “The final outcome would extend financial education to thousands of families ultimately bolstering our nation’s homeownership rate and decrease foreclosure filings.”

For every 100 clients who complete the CDC Financial Fitness Health & Wealth program, nearly $50,000 in assets are saved in savings accounts within one year, the report said.

Maximizing income, increasing savings and reducing debt are skills taught in the CDC program. The program also includes one-on-one counseling with a CDC financial educator to review credit and establish a family budget. The program resumes monthly and is available in both Nassau and Suffolk counties.

The training follows a standardized model similar to other financial education programs carried out by more than 230 NeighborWorks America organizations nationally, in which the Mortgage Bankers Association is a partner.

“Being financially fit is the key to building wealth — regardless of income,” said Ken Wade, CEO of NeighborWorks America. “This program puts Long Island families on a path to financial fitness; know-how that can pay dividends for years to come through increased resources and decreased debt.”