Six steps to tackle household debt: findings from The Netherlands

Schemes to address rising levels of household debt in the Netherlands are proving successful. What can the UK learn from their interventions, asks Clare Cummings.

Just as in the UK and other European countries, household debt in the Netherlands has become a significant concern in recent years. It is estimated that 5% of households are in a situation of serious problematic debt and a further 10% are at risk of entering such a situation. While the economic crisis is partly to blame, the financial behaviour of individuals is also at fault. In the Netherlands, the debt problem is increasingly being considered as a question of behaviour and a wide range of organisations are working to tackle individuals’ ‘unhealthy’ management of personal finances.

However, there is a scarcity of research into the outcomes of debt prevention programmes. Understanding how an individual’s behaviour changes and why requires long-term and detailed studies which are time-consuming and costly. Yet, as municipal governments feel increasing pressure to address the problem of household debt, knowing which interventions work best is ever more important. For this reason, the Dutch Ministry of Social Affairs and Employment commissioned the universities of applied science in Utrecht and Amsterdam to assess the impact of eight key debt prevention interventions.

The eight interventions take one of two principle approaches; focusing on young people and middle-income groups or focusing on teaching financial management skills. Young people experience a disproportionate number of debt problems and so projects in schools are raising awareness of the importance of good financial management. People with higher incomes tend not to access debt counselling services until their situation has become very difficult to resolve and so some municipalities are focusing debt prevention projects on this group. In general, the goal of debt prevention is to promote healthy financial behaviour and so teaching skills in managing personal finances is common to most interventions. Municipalities are offering a range of courses and sources of information to encourage people to pay more attention to how they manage their money.

The eight interventions which were studied are:

1. Educational youth theatre: Theatre performances delivered in secondary schools to teach pupils about managing money and the dangers of debt

2. Individual support for employees with significant mental health needs: Personal interviews with employees aimed at increasing knowledge, skills and self-confidence to take responsibility for personal finances. Fixed costs (rent, utilities etc.) are taken directly from their wage to limit the possibility of new debts occurring.

3. Counselling: Counselling sessions to assist individuals with a particular financial problem and also teach basic financial management skills.

4. Self-help website: A public website provides information on the rights of creditors and debtors. It also provides sample letters which debtors can use to propose repayment schedules.

5. Budgeting skills course: A course in more complex budgeting skills for people with minimal levels of debt. Aimed at preventing participants from incurring debt in the future.

6. Personal advisor: Individuals receive help to manage their finances and make financial decisions for the duration of one year

7. Financial skills classes in schools: Teaching pupils how to manage personal finances and solve financial problems.

8. Budget coaching classes in schools: Pupils are taught personal budgeting skills with the aim of preventing young people from dropping out of school.

All of the interventions were found to have positive outcomes for the participants. The research identified six factors which led to a debt prevention intervention having particular success:

1. The importance of increasing self-confidence

The research found that many people with (minor) financial problems lack the confidence in their own abilities to resolve their debt situation. For example, the feeling that someone will not be able to convince a creditor to agree to a reasonable payment agreement can prevent them from trying in the first place. Various projects focused on discussing, in a positive sense, participants’ own abilities and associated self-confidence. For example, increasing self-confidence plays an important role in the project ‘Household Book-keeping’. By stimulating the participants to do as much as possible themselves, the participants gradually realise that they are able to do a lot more than they think, e.g. learning to limit weekly expenditures by only withdrawing cash from an ATM once a week can result in a feeling of empowerment and self-confidence.

2. The importance of reflecting on one’s own financial behaviour

Many of the interventions involve confronting the participant with the reality of their financial situation. Their situation is often worse than they realised and so this insight forms the starting point for creating a plan to improve their finances. Becoming aware of how unconscious unhealthy financial behaviour had created a problematic debt situation was important for enabling a participant to resolve their situation. Other research has shown that in order for someone to control their behaviour, they must first become aware of their unconscious behaviour and then, from this position, consciously adopt new (financially healthier) behaviour.

3. The added value of the group dynamic

The research found that discussing debt problems and solutions in a group helps to break the taboo of having debt and enables participants to realise that they ‘are not the only one’. Participants found that group discussion about what they could do to improve their situation motivated them to act as they felt that if another participant could do something, so could they. It is widely recognised that when people are in a group, the actions of others in the group influences what they think and do. A group approach to teaching healthy financial behaviour can therefore be effective for encouraging individuals to adopt new behaviour.

4. The commitment of the professional conducting the intervention

The role of the professional was found to be an essential component of several of the projects reviewed. Being able to form a relationship based on trust with the participant formed the basis for successfully discussing the participant’s financial problems and behaviour. For example, individual assistance provided to employees in several interventions was found to be supportive and encouraging in contrast to participants’ previous experiences with debt counselling, where they had felt chastised.

5. Having a holistic approach

The research found that interventions which were embedded into a wider programme were particularly effective at changing behaviour. For example, including financial management in a school curriculum alongside a personal advice service or providing employees with a group budgeting class which can break down barriers to accessing individual financial support as well.

6. The importance of sustainability

It emerged from various interventions that long-term effort is required for an individual to adopt healthier financial behaviour. For example, one project offers support for up to a whole year due to the recognition that creating long-term healthy behaviour usually requires long-term involvement. This project found that it was important for participants to encounter situations together with their advisor where they need to make choices, take action or control impulses. This was an important foundation for participants to be able to continue independently after their support period had ended. Literature on behaviour change stresses that the greater the behavioural change, the more often people need to repeat the process of improvement but that going through it again does not mean that people are starting from scratch.

The research findings highlight the value of local governments taking action on household debt prevention. Understanding which interventions work best and why is extremely valuable to local authorities when commissioning further interventions and these findings could be used by a range of organisations in the UK too. Personal debt in the UK is widely recognised to be a serious problem and, while household debt levels have fallen since the financial crisis, many borrowers are still in a precarious position. Recent research by the Resolution Foundation found that the number of families in the UK with serious debt problems could double to 1.2 million if interest rates rise faster than expected and household income does not increase.

Yet, despite the seriousness of the situation, financial advice services are disappearing due to the cuts in public funding and the legal aid reform. Housing associations and credit unions are being encouraged to fill the gap but these organisations still require funding and demand for support is high. Research conducted in other European countries can provide valuable lessons for the UK government and other organisations working to address the household debt problem. Sharing findings and conducting further research will be necessary if we are to effectively tackle and reverse the escalating household debt problem.