Study: The Psychological Cost of Debt

Money makes the world go round -- but it can also make your head spin. For most people, not a day goes by that a credit card isn’t swiped, an online bank account balance isn't checked, a handful of change isn’t dropped into a tip jar, or a bill isn’t paid online. Our lives are like a highway for dollars and cents: constantly flowing in and out at high speeds. And sometimes, just like on a regular highway, we can lose control.

Consumer debt in the U.S. has been on the rise for 17 quarters in a row, as of the third quarter in 2018. Americans are very familiar with debt, which means they are also well acquainted with its effect on their mental health and well-being.

We surveyed over 1,000 indebted Americans to explore the link between happiness, fulfillment, self-esteem, and financial distress. Join us on a journey into the psychology of debt.

The meaning of life

Celebrity mega-mansions, desserts that glitter with gold leaf, figure-flattering high fashion… many people consider a life of wealth and abundance to be the ultimate destination. We wanted to find out if people thought stacks of dollar bills amounted to a sense of satisfaction and fulfillment.

Are material possessions really the key to happiness? In poverty-stricken and disadvantaged areas, the answer might be yes: One study conducted in rural Zambia revealed that women who received monthly money transfers experienced an increase in overall life satisfaction, especially with regard to their children’s well-being, health, and future prospects. But when it comes to wealthier countries, money itself is hardly a direct pathway to happiness. Money may not buy happiness, but the belief among a majority of our respondents was that wealthy people were in fact happier.

When it came to the existential question itself, the majority of the people we surveyed expressed a fairly level-headed view: 56% said money could buy happiness “to an extent,” and another 17% said it absolutely could. Just 8% thought that money could not lead to an overarching sense of satisfaction.

Where do you fall on the spectrum? Knowing this is key to better understanding your own psychology of debt.

Stifled satisfaction

Does debt put a damper on achieving self-actualization? Do certain kinds of debt weigh heavier on the mind than others?

Achieving life satisfaction is more of a journey than a destination, but certain factors can help ease the process along. No matter their relationship with debt, most of our respondents expressed satisfaction with their life, although individuals who have debt were a little worse for wear.

Of respondents, 70% with debt reported feelings of satisfaction, compared to 83% of those without debt. There are notable mental and emotional costs of debt, and the fact that 97% of people with debt believe they'd be happier if they were out of debt is strong evidence in the favor of that fact.

These figures are understandable given the connection between experiencing extreme stress and being in debt. In fact, this link frequently devolves into a negative feedback loop: Worrying about debt can bring on mental health issues or distress, and compromised mental health can lead to erratic or irresponsible spending in an attempt to self-soothe.

It would be hard to argue the case that debt improves one’s quality of life -- but which loans create the most chaos for our respondents? Those with a mortgage, which is generally considered to be good debt, reported a life satisfaction rate of 86%, followed by those with an auto loan at 82%.

People with medical loans were the absolute least satisfied with their life at just 64%, followed by people with credit card and personal loan debt at 75%.

“Living life to the fullest” means different things to different people. Some people might live it up with great food, some prefer white-sand beaches, and others are most content in their favorite armchair with a glass of wine in hand. The one thing that seemed to significantly help with achieving life satisfaction, though, was a lack of debt: Of respondents with no debt, 57% said they lived life to its fullest, compared to 42% of indebted respondents.

It’s not hard to understand why indebted individuals might find it difficult to self-actualize. Loans can hang over your head like a black cloud, but the potential effects of debt aren’t limited to people’s emotional well-being. A study published in the journal Diabetes Care found that people who were stressed about work and money were at a higher risk for heart disease, stroke, and diabetes.

Of debt-free respondents, 60% felt they made the most of themselves, compared to 49% of indebted individuals.

Fulfillment is a sense of having achieved a certain milestone, goal, dream, or desire -- think completing your first marathon, getting a raise at work, starting a business, or meeting the love of your life. People with no debt had an easier time attaining this level of happiness, but by a less significant margin. While 63% of indebted individuals felt fulfilled, 71% of debt-free people expressed the same sentiment.

What makes a meaningful life? One Pew Research Center study revealed that while Americans overwhelmingly turned to their family as a source of meaning in their lives, they also listed career and money among their top three most important things. That would point to debt being a net detractor of meaning -- a hypothesis that was confirmed by our survey on the psychology of debt.

Drowning in debt

Not all debt is created equal, and certain loans can lead to a much heavier financial burden than others. In this section, we’ll explore our respondents’ debt levels by category, as well as how many people can make their monthly payment -- or not.

When it came to monthly payments, personal loans -- while second to last in terms of total debt amount -- were the most expensive debt to have on a monthly basis, likely due to the extremely high interest rates associated with these types of loans. However, not all debt is bad debt: If you’re working toward a brighter future and are certain you’ll have the means to pay your dues in the long term, debt like auto loans and mortgages can be regarded as a building block as opposed to a stumbling block.

For our respondents, medical debt was the only category that saw a significant percentage of people being unable to make their minimum payment every month (42%). While it might seem counterintuitive, the majority of people with medical debt in the U.S. owe money for a single health event, as opposed to racking up bills associated with chronic illness.

For almost every type of debt, the largest percentage of respondents was concentrated in the “minimum monthly payment” category. Credit cards were the only exception, with 58% of people making payments that exceeded the minimum each month.

Loans and limitations

Debt can create massive limitations in one’s life, both mentally and fiscally. Our indebted respondents reported feeling less optimistic and less self-confident while being unable to save money in a way that made them feel prepared.

Just under half of our indebted respondents felt their loans loomed over them in more ways than one: optimism, self-esteem, and even their sense of direction in life. The mental and emotional costs of debt are high.

With often-hefty loan payments being pulled out of their accounts every month, it’s no wonder our indebted respondents listed savings as the area of their life most impacted by debt, with 66% reporting their loan burden hindered their ability to save money. If you’re feeling the burn in your savings account, here’s how to achieve your savings goals this year.

General quality of life issues were tied for second place, with 59% of respondents saying debt prevented them from treating themselves from time to time and living their desired lifestyle. Arguably the most troubling revelation was that approximately one-third of respondents said their debt impacted their ability to afford adequate food, housing, and essentials.

Troubled thoughts

They’ve got their minds on their money, and their money on their minds: Our study revealed that debt tends to carve out a very special place in the worry center of people’s brains… and stay there.

It can be difficult to take your mind off things that worry you, and debt is no exception. Nearly three-quarters of indebted individuals said they thought about their financial burden more than they wanted to.

So if a majority of people are bogged down by their debt more frequently than they’d like, what does that frequency look like? The highest concentration of respondents, 28%, said they thought about their loan burden every day. Nearly identical tranches (between 20% and 22%) thought about debt almost every day, multiple times a week, and once a month or less, while just 10% thought about it just once a week. In more boiled-down terms, nearly half of respondents (48%) had debt on their mind either every day or almost every day.

The blame game

Shame and blame go hand in hand with debt. “How did this happen?” “Why did I allow myself to fall into the trap?” “How did I let it get this bad?” Next up, we explore our respondents’ battles with feeling ashamed.

There is no one way to rack up debt. It can happen slowly or all at once, and in small amounts or huge sums. Depending on the type of debt they had, feelings of self-blame varied quite a bit among our respondents.

Credit card debt was most frequently associated with feelings of guilt, with 49% of indebted respondents saying they felt completely at fault for their situation. If this type of debt is weighing on you, you are far from alone: studies have shown that the American middle class, in particular, has struggled with the cycle of debt and keeping up with credit card bills.

On the other hand, the largest number of individuals who did not feel at fault for their situation were those with medical debt, likely because most medical issues are either accidental or unpredictable (like a broken leg or congenital disease).

What medical debt lacked in self-blame, it made up for in feelings of shame: More than three-quarters of respondents with medical loans were ashamed of their situation. Thankfully, in recent years, lawmakers have taken steps to lighten the burden for those who have this type of debt, including instating a 180-day grace period before it can be listed on a credit report. Further credit-friendly measures were also implemented.

On the whole, it seemed there was no such thing as good debt in our respondents’ opinion: Even something as innocuous as a mortgage had 57% of people feeling ashamed of themselves, simply for buying a home.

Digging your way out

If you’re in debt, it can feel overwhelming -- like you’re carrying the weight of your loans on your shoulders, metered out in gold bars. Whenever your mind ends up wandering to dark places, just remember that debt is ageless, faceless, and genderless: Hundreds of millions of Americans are currently walking around with some form of debt.

You are not alone in this -- especially not with Motley Fool Money at your fingertips. Motley Fool Money is a treasure trove of financial advice and guidance, bursting at the seams with helpful resources like credit card rankings, beginner guides for investing, and dozens of savings and money management tips. Do you have banking, debt, investments, or credit cards on the brain? Visit Motley Fool Money to shed some light on financial wellness -- and shed some of that weight in the process.

Methodology and limitations

For this study on the psychology of debt, we surveyed 1,007 people with various amounts of debt. Of our respondents, 523 were female, 482 were male, and two did not identify as male or female. Our average respondent was 37 years old. To ensure that all respondents took our survey, all were required to identify and pass a carefully disguised attention-check question.

To ensure that we accurately surveyed people who were in a position to be affected by their debt, we set a minimum debt threshold of $1,000; individuals who had less than $1,000 in debt were considered not to have debt for the purposes of this survey. Of our respondents, 362 had more than $1,000 in debt, 140 never had any debt, 197 never had $1,000 or more in debt, and 308 previously had $1,000 or more in debt but paid it off. These respondents were selected for our survey based on their amounts of debt, and their relative percentages do not reflect those of the general population.

These data rely on self-reporting, and statistical testing has not been performed. These data are intended to be used for entertainment purposes only. In most cases, questions and responses have been rephrased for clarity or brevity. To help ensure statistical accuracy, outliers have been removed where appropriate. Potential issues with self-reported data include but are not limited to: exaggeration, selective memory, and attribution errors on the part of respondents.