More than two-thirds of US households hold some form of debt, and household savings rates tend to be lower in the US than in many other developed countries. Particularly for low- and middle-income households in the US, high levels of debt and low levels of savings can impede a family’s ability to meet basic needs, build assets, prepare for retirement, mitigate emergency expenses, or withstand a loss of income. While structural factors like unemployment can lead to under-saving and over-borrowing, a growing body of research suggests that other factors, such as limited attention, present bias, or other behavioral barriers, may also be at play.
The US Finance Initiative (USFI) uses insights from behavioral economics to develop and rigorously evaluate financial products and services that help low- and moderate-income Americans lead healthier financial lives. USFI has a unique role in the consumer finance field in the US, connecting academics and practitioners to design and test innovative financial products.
The initiative directly manages a portfolio of randomized evaluations and pilots with financial institutions and service providers across the US. Our current projects focus on evaluating products to help households pay down debt, save more, and better manage their finances. USFI has ongoing partnerships with the Ford Foundation, the Center for Financial Services Innovation, RAND Corporation, the Filene Research Institute, and leading financial institutions across the US.
Studies Supported by the US Finance Initiative:
Credit-building loan products have begun to proliferate in the U.S. marketplace. However, there is little evidence on how much these products boost credit scores and for whom. IPA and RAND, a nonprofit global policy think tank, are conducting an impact evaluation of a credit-building loan product offered at a credit union in Missouri, both alone and coupled with financial counseling. In addition, this study evaluates a product add-on designed to help these borrowers save.
Researchers conducted a randomized evaluation to investigate the demand for commitment savings products or financial counseling, and the impacts these products and services have on savings, among a sample of low- and moderate-income credit union members in New York City. Analysis of the effect of these financial products on savings, borrowing, and credit scores is ongoing.
Americans who have difficulty formally accessing credit from conventional financial institutions often turn to costly products such as high-interest pawn and payday loans or bank account overdrafts. Researchers in this study have partnered with a community development credit union to evaluate the demand for safe, affordable, and transparent small dollar loans, and the impact of behaviorally-informed product features on the financial capability of credit union members.
Researchers designed and piloted a program called Borrow Less Tomorrow (BoLT) that took a behavioral approach to debt reduction, combining an accelerated loan repayment schedule with peer support and reminders. Results from a sample of free tax-preparation clients in Tulsa, United States suggest a strong demand for debt reduction: 41 percent of those offered BoLT used it to make a plan to accelerate debt repayment.
Increasing Savings and Reducing Reliance on Credit Card Debt for Low-Income Individuals in Washington DC
This project will evaluate the impact of commitment contracts and reminder messaging on savings behaviors among low- and medium-income credit union members in Washington DC. Traditional financial products which dominate the consumer finance market tend to operate under the assumption that consumers act in a rational manner and fail to take into account cognitive biases which can impede the realization of financial goals.
There are growing concerns that American households tend to borrow too much and save too little, making it hard to meet basic needs, build assets, prepare for retirement, and pay for emergency expenses. Large debt burdens may compromise individuals and families’ ability to create a safety net or make investments for the future.