The science behind alternative credit education

By law, all individuals who file chapter 7, chapter 11, chapter 12, or chapter 13 are required to obtain credit education. This is divided into credit counseling and debtor education, which combine to advise borrowers on monetary and debt matters. Besides that, an effective credit education program may offer budgeting and money management guides.

Ultimately, credit education is all about paying down (or paying off) debts and improving the credit score. As players in the banking and finance space, alternative lenders like fintech firms and neobanks may benefit from understanding the science and psychology behind alternative credit education and execution.

The role of alternative lenders

Alternative lenders are generally nonbank institutions that offer typical bank-related services like credit cards, loans, and transaction processing. As mentioned, some good examples of alternative lenders are neobanks and fintechs.

One of the most significant differences between traditional banks and alternative lenders is access to credit for borrowers. Neobanks and fintech firms are more willing to extend credit to borrowers who wouldn’t otherwise qualify for the same facilities in traditional banking institutions. These individuals have a checkered credit history, low income, little to no collateral, etc.

The increased penetration of alternative lenders has come with positive reactions in some circles. However, some believe that the target customers of alternative lenders are typically people who need help to service loans. In other words, there’s a reason why they couldn’t qualify for conventional loans.

Rather than denying this population access to credit facilities, credit coaching is a better way to approach the issue. Credit coaching is a program that educates borrowers on how to pay off their debts and avoid taking unmanageable credit. While those filing for bankruptcy are legally required to take credit counseling, anyone can take advantage of credit coaching at any stage in their loan process.

The science and psychology behind alternative credit education and execution

On a purely objective level, alternative credit education can help at-risk borrowers repair their current debt status and avoid taking on unmanageable loans. That’s because credit coaching provides substantive and personalized budgeting and managing debt strategies.

According to the Department of Justice, credit education involves the following:

  • Analyzing the borrower’s current financial situation
  • Examining the factors that led the borrower into the financial situation
  • Creating a plan for addressing the problem while avoiding negative amortization of debt

Perhaps the most important thing for borrowers who already have credit is that they can create a “get out of debt” plan (also known as a debt repayment plan, or DRP for short). This is an actionable plan that’s based on the pros and cons of the available debt relief strategies. For example, a credit counselor may find ways for a borrower to apply for credit card forgiveness.

In some cases, credit counselors actively negotiate for lower interest rates for their clients. This reduces monthly payments, thus making the debt more manageable.

Ultimately, credit coaching provides current and prospective borrowers with financial resources to help with financial decisions. Such resources enable borrowers to manage their finances better and stay out of debt, whether they are articles, newsletters, websites, or one-on-one lessons.

Psychologically, credit coaching ensures that someone is not alone with their finances. This can be mentally and emotionally calming, knowing that a counselor is willing to walk with the customer through their loan borrowing and servicing process. If customers are psychologically ready to meet their obligations, alternative lenders will benefit from fewer defaults.

References

https://www.justice.gov/ust/frequently-asked-questions-faqs-credit-counseling

https://medium.com/infi-empathai/how-personality-profiles-can-strengthen-the-alternative-lending-industry-8bd62cea4db9

https://www.experian.com/blogs/ask-experian/does-credit-counseling-hurt-your-credit/