The Psychology of Debt
In an unprecedented era of easy credit, it’s important to have the right attitude to debt. Here, we explore the psychology of debt, its impact on our mental health, and how it can affect our lives without us even realising it.
When you think of debt, what comes to mind? Credit cards, business loans, mortgages, or perhaps even student loans. It’s very difficult to imagine an aspect of life that doesn’t have some relationship to debt. The place you live in might be paid for using debt, in the form of a mortgage. You might be a business owner, using a business loan to get your enterprise off the ground.
There is a chance you have taken out a loan to help cover the costs of buying a car or paying for household items, just to take the pressure off your own personal finances. Some of the spending you have made in the past week or so might have been made using a credit card. You might have paid for any higher education you undertook by taking out a student loan.
Debt is everywhere you look and has an enormous impact on how we see the world – and we have got the numbers to prove it.
NerdWallet’s independent survey into the UK’s relationship with debt, in September 2019, found that 75% of all adults hold some form of debt. This includes credit card debt, mortgages and student loans, just to name a few.
We’ll show you just how prevalent credit is, how reliant we are on debt for everyday spending, and how debt itself has a direct impact on our mental health.
Living in a world where access to credit is easy makes it important for us to look at the effect of debt on mental health, as a significant number of people who have some form of debt are also likely to have a mental health condition.
Wages have remained stagnant for over a decade now, and many consumers have felt as if they simply had no choice but to resort to credit and borrowing, to help finance their lifestyles. This means credit is fundamentally changing how we value things.
So has debt become something we can’t live without in our daily lives, or is it something we can take or leave? Does it add an unnecessary strain and do more harm than good? Or, with the right awareness and understanding, is it something that can actually enhance our lives? What is our attitude to debt and does it create a sense of artificial wealth?
These are just some of the questions we intend to answer, so if you are thinking of using credit, or if you are already carrying debts in some shape or form see where you fit into the UK’s debt story, and dive into the psychology of debt, and how it affects your life without you even realising it.
Household debt – what’s it worth?
Every penny you borrow adds up to what appears to be an unprecedented mountain of household debt. The Money Charity estimated that in June 2019, the UK had built up personal debts worth as much as £1.6 trillion. To put this into perspective, the entire UK economy was estimated to be worth £2.1 trillion in 2019. It looks like our debts are starting to catch up with the total value of our economic output.
But how does this work on a personal level? We carried out an exclusive survey, asking all those with some kind of debt about what kind of debts they had incurred. This is what we discovered:
|Type of debt||Total||18-34||35-54||55+|
|Personal finance loan||14%||15%||18%||9%|
|Finance plan (e.g. car/household item)||12%||17%||12%||8%|
Types of personal debt
Personal debts typically include the following: personal loans, credit card debts, business loans, and mortgages. These forms of debt often overlap, as someone who holds one of these debts might easily hold another kind simultaneously. This reflects how debt really does get everywhere.
By far, credit card debt was the top-ranking form of debt people claimed to have, but by no means the only debt they held. In many cases, people have a combination of some of these types of debt. These debts, in the form of loans and mortgages, go into powering our businesses or keeping the housing market turning, as well as keeping roofs over our heads year after year.
But as we have seen, our overall debt to income ratio has remained at high levels for some time now. Is this sustainable? That remains to be seen, but it isn’t inconceivable that in a matter of years, if the pace at which we borrow exceeds the rate of economic growth or wage growth, we might just find ourselves living beyond our means.
The Office for Budget Responsibility has forecast that, if people keep borrowing at present rates, our total household debts will reach almost £2.4 trillion by 2025.
A burden for each of us
At the time of our survey in 2019, there were over 66 million people living in the UK. If you took our total personal debt pile, worth £1.6 trillion, and distributed it equally among each adult in the country, each adult would be holding an average personal debt of at least £31,139. That’s equivalent to 119% of the average annual salary.
Households are unique, each with varying degrees of income and thresholds at which their personal debt risks becoming unmanageable. That’s why it’s important that each household knows the state of their finances, so they can work out whether they can sustain any borrowings they might intend to make.
Good debt vs bad debt
It can be tricky to avoid going into debt at some point in your life. That’s why it’s important to know the difference between good and bad debt.
Good debts are debts that serve as something of an investment in your future (for example, student loans or business loans). They have a proven long-term, positive impact on your life, whether that’s professionally or academically, for example.
Bad debts are debts that incur great costs – for example, high interest – which are a long-term drain on your resources. Credit card debts, if chosen without factoring in the total costs such as interest, can end up becoming bad debts, so adequate research and a well-prepared budget are always required.
We asked respondents to our survey about whether they were going into debt for valid reasons or whether the purchases they made, having incurred debt, were less than essential.
Do you only use debt for essential purchases?
Lines of credit
To understand our relationship with debt, it’s important to understand where credit comes from. When you think of credit, there is a good chance your thoughts immediately dart to plastic – credit cards, interest payments and electronic transfers.
As we showed, credit card debt is something nearly half of those with some kind of debt have to contend with.
Credit cards help transfer funds in the blink of an eye, using microchips and a PIN, with the actual cash flow provided by your card issuer via a line of credit. The person borrowing on credit makes use of the sum, on the basis that they eventually repay the sum they spent back to the card issuer. Interest becomes something to consider if the full balance isn’t paid off by the due date each month.
Some issuers provide a variety of incentives to attract customers to use their cards, through offers such as 0% interest for a limited time only. As you can imagine, this seemingly encourages more consumers to buy into the idea of spending on credit, because for a limited time at least, it is possible to make quick purchases, without interest bills to contend with.
Did you know?
Credit is believed to stem from the Latin root word ‘credere’, meaning ‘to trust’ or ‘to believe’ – it is also the root word for ‘credible’, which we use when talking about something that is believable. The relationship between people and debt has always revolved around the trust held between borrower and lender, going back thousands of years.
The growth in the use of credit cards has contributed to what some economists call the shift towards a “cashless society”, in which transfers of money are increasingly digitised, and physical currency looks set to become obsolete.
With this in mind, we asked our respondents about how they used credit cards, to see whether the following applied to them:
In the last 12 months, have you made a purchase on your credit card without first considering how and when you would pay it off?
Over a quarter of people with credit cards admitted in our survey that they went ahead with purchases, despite the fact that they had no idea exactly how they would make good on repaying this debt. This would suggest that the temptation to spend on credit proved too great for 27% of those surveyed, despite the fact that they borrowed with no consideration for what it would mean financially in their future.
Credit is perceived as being something quick and easy to use. But this is a dangerous way of looking at running up any kind of debt. In an ideal world, a borrower only borrows as much as they know they can afford to pay back.
Some debts might prove difficult to repay, but don’t carry some kind of penalty if you find yourself in this position. For example, student loans are simply written off within 30 years if someone proves unable to earn over a sufficient level of income to enable them to pay off their loan.
In the case of credit card debt, however, as with many forms of debt, lenders that provide you with a loan are highly likely to impose some penalty if you prove unable to pay over a sustained period of time. Fortunately, a large majority of respondents in our survey who had some kind of debt showed that they were in good standing when it came to repaying debts.
Did you miss a repayment on one or more forms of debt you have had?
Our findings suggest that, despite all the different circumstances borrowers might find themselves in, there is a clear majority of people who are able to cope with their debts and pay them off.
Furthermore, defaults aren’t so common, but a significant number of people still admitted to us that it had happened to them at some point in the past.
Have you defaulted completely on a form of debt in the past? (i.e. been unable to repay it)
Defaulting on debt has a major impact on your credit rating and can limit the kinds of finance you can expect to find available to you if you require a loan in the future. Defaults can result in serious legal ramifications and possible penalties, while bailiffs could be brought in, adding to the stress you might already be experiencing. Defaulting on something as important as a mortgage means you could risk losing your home.
This is why it’s important to be fully aware of your own credit history. When you seek out a loan, a credit check might be sought, so the provider can have a look at your credit score and your relationship with credit.
This might mean they will have checked with utility providers or your phone company, for example, to build a detailed picture of just how suitable you would be to be provided with credit.
Terms and conditions apply
When seeking out a loan, whether it’s for a business loan or simply to finance household spending, you should always be aware of the different terms and conditions applied to each loan, as these can differ significantly from provider to provider. Good budgeting ensures that you only borrow what you know you can afford to repay, having included any interest.
Bricks and mortar
After credit card debts, mortgages are the next largest forms of debt that the average person carries, according to our survey. Over a quarter of people with some kind of debt have them, and they tell an interesting story about the history of the housing market in the UK.
“My mortgage is my number-one highest household outgoing and contributes to the main chunk of my stress. There’s no leeway on payment dates, so I have to ensure that the money is available each month. With other bills, you can sometimes chop and change them, but I’m too scared to do that with the mortgage, so it always comes first.”
Claire Roach, personal finance blogger and spokesperson, Daily Deals UK
Getting on the housing ladder is one of the biggest challenges for many, and it’s easy to see why. With the UK population rising to new all-time highs but housing stock failing to keep up, the costs of housing have reached unprecedented levels. This fundamental disconnect between supply and demand over a number of decades helped lay the foundations of what we know as the UK’s housing crisis.
But the UK’s housing crisis is nothing new. Even in the 1960s, people bemoaned the lack of affordable housing, and this was during a time of record housebuilding and a smaller population. In the past, a large chunk of the UK housing market was state-owned. Council homes were built in their thousands to house the country’s booming post-war population.
However, by the 1980s, the then Prime Minister Margaret Thatcher espoused the idea of the property-owning democracy through her party’s Right to Buy policy. People could now seek to take their homes out of the public sector and own their own homes. It was a policy that had its roots as far back as the 1950s, but was such a radical idea that it took many years to finally gain traction.
A famous sign of homeownership from the 1980s onwards was the sight of double-glazed houses as far as the eye could see. But times have changed. In 2007, the number of people owning their homes outright or buying with a mortgage in England peaked at 73.3% of all households.
In the ensuing decade, the economy was hit by a severe global financial crisis, and this was followed by a slow economic recovery. As a result of this, by 2016, homeownership rates had fallen to a low of 63.4% of all households.
In just a decade, the concept of homeownership had diminished significantly, but a majority still owned their homes, suggesting that owning a home remains a significant ambition for many people, even today.
Believe it or not, the average price of a home in the UK used to be worth £2,026 in 1957. By 1983, prices had risen to £27,623.
In 1983, house prices were about 2.7 times the average first-time buyer’s annual earnings, according to Nationwide. By 2019, the average house price had risen to £214,302, totalling over five times a first-time buyer’s earnings. This reflects how the cost of housing has continued to outpace the growth in wages for well over a generation.
You might look at how the cost of housing exceeds wages and think “these prices can’t possibly be justified, can they?” But there is more to the housing market than meets the eye. Since the end of the Second World War, the economy has changed in fundamental ways, so the costs of housing have arguably increased, to match these new realities.
In 1971, there were 24.5 million people employed in the UK but, by 2019, the employed population had grown to 32.8 million. Simply put, more people work than ever before, earning a wage, saving up and most likely looking for somewhere to live, whether that’s by themselves or with others.
Even so, not everyone is in a position to partner up and split the costs of buying a home. When looking at the housing market as an individual, that dream of owning your own home is certainly becoming a more remote possibility than ever before.
In recent times, the government has announced measures that seek to boost the long-term supply of our housing stock. For example, there is a 300,000-per-year target for the number of homes the government is aiming to ensure are built by the mid-2020s in England. This ambitious target is intended to make up for the fact that, until very recently, house building in England alone had been touching low levels not seen for decades.
The house price/earnings ratio
The ratio between house prices and earnings serves as a useful indicator of whether the housing market is in bubble territory, as the ratio has tended to have ups and downs, settling at an average of prices being roughly three and a half times the typical income, according to Nationwide.
Prices rarely moved much more than four or five times the average annual income during bubbles and no less than two times the average annual income during busts, according to Nationwide’s own calculations (using data sourced from the Office for National Statistics (ONS), as well as interpolated earnings data from the National Earnings Survey).
Average prices have remained close to levels the ratio would deem ‘bubble territory' for over a decade, at five times the typical first-time-buyer’s earnings. However, the problem with this metric is that, as well as the number of potential homeowners with incomes increasing, it’s tricky to tell whether higher prices at present are all simply due to a bubble or simply reflecting a fair value, given the great supply constraints.
Whatever the cause of the historically expensive cost of housing at present, homeownership is more expensive than ever before, and anyone considering taking out a mortgage needs to have a clear understanding of the potential costs involved. The Bank of England base rate, which remains at 0.75% at the time of writing, has a great impact on mortgage rates and the sums you would expect to have to pay, as you start paying down a mortgage.
The ONS estimates that wages are starting to grow again in real terms, but due to the extent of wage deflation in recent years, the typical worker in Great Britain will have seen their salary stay virtually static, between the peak in 2008 and mid-2019.
Despite this lost decade for wage growth, the housing market has remained buoyant, as average house prices have grown in nominal terms by almost 45%, between their trough in mid-2009 and the spring of 2019. In an ideal world, rising incomes would be responsible for such a rise in the value of homes.
A decade-long wage freeze, combined with a booming population and a chronic shortage of housing stock are the more likely things at play currently, meaning that the apparent housing boom since the financial crash is more of a reaction to constraints in supply, as opposed to a healthy pick-up in demand.
An environment of lower interest rates for longer than some expect might encourage more people to consider taking advantage of lower mortgage rates and attempt to climb the housing ladder. However, in an era of volatile markets, it’s unclear whether low rates are here to stay, or whether economic and political developments might force policymakers to raise interest rates which would in turn increase mortgage costs for consumers.
The Monetary Policy Committee of the Bank of England reviews the base rate every six weeks, so prospective home buyers should always keep an eye out for them, as sudden changes in policy can have a drastic impact on the costs of trying to buy a home and mortgage repayments.
Repaying debts – confidence and control
However, not everyone who is borrowing money necessarily has the right things in place to make sure they are in a position to repay their debts. We asked respondents to tell us if they considered themselves in control of their debts, and this is what they told us:
Do you feel in control of your debt?
This would suggest that exactly 75% of those with some form of debt were confident enough to feel that they knew what they were dealing with. Despite this, we decided to drill deeper and explore whether this confidence was justified, or whether it was simply wishful thinking. It’s one thing to say you feel in control of your debts, but it isn’t the same as saying you have an actual plan for paying them back.
Do you have a clear plan of how and when you will pay off your debt?
If feeling in control of debts and having credible plans to repay them were the same thing, you would expect these responses to be identical. However, as you can see, there is a slight discrepancy between the two answers we received from respondents.
In particular, 71% of those aged between 18 and 34 with some debt had told us they felt in control of the debt but, under closer examination, 61% of people in the same age bracket with some kind of debt admitted to actually having a clear plan to repay their debts. If you hold debts or know someone who does, it’s always important to make sure that confidence in repaying debts translates into a tangible way of doing so.
When handled responsibly, debts can actually be used to build up a good credit history, provided that you have a plan in place to make the repayments.
“I constantly worry over debts. I have spreadsheets for everything because otherwise I would get really overworked… Put a system in place that works for you. It may be debt repayment spreadsheets, charts, printables, visiting Citizens Advice for support, or simply consolidating debts. Without a system to manage your loans and pay off credit card debt, your stress can increase.”
Claire Roach, personal finances blogger and spokesperson, Daily Deals UK
The culture of debt
As mentioned before, there is demonstrable evidence that there is a culture of debt, where providers of financial services look for ways to provide consumers with access into a world of seemingly endless opportunities, all made possible by taking out loans or borrowing on credit cards.
For example, credit card issuers encourage consumers to use their credit cards, enticing them with incentives such as interest-free offers for a limited period of time. In the right situation, where a consumer is aware of their financial situation and also in a position to repay their debts, this sounds an attractive idea.
Gambling as an industry thrives due to high-risk behaviour that all too often pushes players into debt. This happens when a bit of fun turns into the altogether more serious issue of ‘problem gambling’. Highly addictive games tempt people into high-stakes situations, and not everyone is fortunate to have a winning hand every time
We’ve spoken a little about the difference between good debt and bad debt. Problem gambling is a high-risk activity as it is quick in generating bad debt. The compulsion to continue gambling, in the hopes of making a great fortune, overrides the more rational need to avoid taking unnecessary financial risks
A cross-sector initiative by Gamcare, a UK charity supporting those affected by problem gambling, aims to address the issue. The project brings together banks, money and the debt advice sector, the gambling industry as well as gambling support services and service users to work together to coordinate the development of best practices so consumers receive timely advice and support to reduce potential harms.
“The relationship between gambling and debt is interdependent. Financial difficulties can be a driver of problem gambling as much as gambling can be a cause of debt. Each year, around two-thirds of the people we speak to on the National Gambling Helpline disclose some form of debt and related financial difficulties because of their own gambling, or because of a loved one’s gambling.”
Spokesperson for GamCare
However, as we have seen, at least a quarter of people with some kind of debt lack the confidence to say they are in control of the debts they have. Debt is ever-present in modern culture, so we decided to examine how this made people feel. Debt is sometimes seen as something that is undesirable, no matter how easy it might be to pay back.
Addressing this perception head-on, we asked respondents with some kind of debt whether they believed credit somehow cheapened the value of items they had bought, in comparison to goods they had purchased using their own money
Almost a quarter of them told us that they felt less attached to items bought on credit than those bought using their own money. This suggests that there is a segment of the population that still feels as if items bought using debt make them uncomfortable on some level. Perhaps they felt as if the items were undeserved because it seemed as if the money they borrowed to purchase them felt as if it wasn’t the result of a hard day’s work or that it had been purchased without using money they had been saving.
We also decided to ask a more fundamental question: whether people with some kind of debt felt as if using debt had enabled them to enjoy a higher quality of life than they would have been able to achieve otherwise. The results suggested that debt plays a far greater role in our perceived well-being than anyone might have realised.
Do you feel using debt has enabled you to live a better or higher quality of life than you would otherwise have been able to?
Almost half of those with some kind of debt believe that debt is an enabler, which ensures a better standard of living for them than might have been the case if they were simply resorting to earnings and savings. Based on these findings, that would potentially mean that much of what we consider to be a decent standard of living might be slightly distorted by the fact that some of it, by necessity, had to be financed by debt
Looking into the demographics a bit further, we found that 50% of 18- to 34-year-olds with some kind of debt believed debt had enabled a better quality of life, but only 39% of those aged over 55 agreed.
This indicates that older borrowers possibly had better provisions to ensure what they would consider a good standard of living, or simply didn’t think debt was so important when it came to the quality of life they had.
Weakest real wage growth for centuries
The growth in household debt as a percentage of income isn’t entirely a surprise, especially since the financial crash of 2008, when you consider that real wages (wage growth adjusted for inflation) have been effectively stagnant for over a decade, according to the ONS.
Businesses cut back on salaries rather than simply making redundancies to stay afloat over the years, meaning unemployment is lower than it otherwise would have been, but our pay packets simply don’t stretch as far as we might want them to.
Debt in our heads
We have revealed the ways that credit seemingly enables a higher quality lifestyle, as well as disclosing how being confident about controlling debts isn’t the same thing as actually having a plan to pay them off. When you consider how the era of slow wage growth has potentially prompted more people to go into debt to finance spending, you realise how much of a structural necessity debt seems to be.
Its role in helping finance all sorts of things in everyday life has an impact on our mental health, whether we like it or not. We asked our respondents if they felt the strain mentally, having taken out any kind of debt, and their responses said much about the lasting impact of debt.
Do you think debt has had a negative impact on your mental health?
Our respondents had great awareness of debt having a damaging impact on their mental health, and this is something that has been observed in other surveys as well. The National Debtline, a charity that assists those who struggle with debts, claims that as many as 50% of all adults who have some kind of debt also have some kind of mental health issue.
We discussed in a previous article on the subject of student finance how student loans are having an impact on the mental health of young people, so there is a clear relationship between debt and the mental health of the population at large.
With this in mind, we asked our respondents whether they felt like there was adequate support, in the event that debts started damaging their mental health. We discovered that only 51% of respondents with some kind of debt felt like they could count on this kind of support, highlighting a systemic problem.
Greater mental health support required
This failure to cater to the mental health needs of those with debts extended across age and gender boundaries. Women with debts felt marginally more supported when it came to mental health, at 52% but, even so, almost half claimed otherwise.
When narrowed down to the 18 to 34 age demographic for men and women together, the figure dropped to 50%, for those with some kind of debt, meaning an equal number of people in that age group felt like they lacked a safety net.
With this in mind, it was important to ask whether people felt like they were under unnecessary pressure to borrow. Our findings suggest that financial institutions are placing people under great pressure to do so.
Do you feel banks are too eager to encourage consumers in the UK to take on different forms of debt?
A clear majority of people felt that the urge to borrow wasn’t necessarily stemming from their own desire to take on debt, but from an increasing encouragement by financial institutions to take advantage of cheap borrowing and easy access to credit. This was reinforced by the fact that almost half (49%) of those we polled admitted to having felt bombarded by marketing for debt products, particularly among those aged 18-34 (54%).
“While using credit is a normal part of life for most people, debt can become a huge burden when it becomes unmanageable. At the time of writing, more than two in five StepChange clients are in vulnerable circumstances, and around half of these are due to poor mental health, which has a close link with debt.
“Helping people to deal with their debt can help. Among StepChange clients, an improvement in wellbeing is typically something that people experience once they have taken advice and have a plan to address their debt.”
Spokesperson from debt charity StepChange
The right attitude towards debt
In order to be in a position to repay debts properly, you need to have the right attitude to debt. Almost half of the respondents we spoke to explicitly told us they believe they felt bombarded with marketing trying to entice them to become consumers of debt products.
Banks are also in the firing line, standing accused of trying to encourage people to take on various kinds of debt, despite the fact that as many as 32% of people admitted to us that they had no clear plan for paying off debts they held. It’s as important for people to know their limits when it comes to debt (whether that’s a specific amount or simply none at all) as it is for financial institutions and providers of finance to be careful not to take advantage of vulnerable people.
With over 40% of us experiencing a negative impact on mental health as a direct result of having some kind of debts, it’s important that providers are forthcoming with all the support a borrower might need if they find their debts damaging their mental wellbeing. Access to organisations and debt charities is crucial, so potential or existing borrowers have impartial, independent advice when it comes to seeking credit.
The free market means terms and conditions vary from provider to provider, so you need to read the small print before agreeing to any kind of loan or borrowing, as this might flag up important requirements financially that you might suddenly realise you may not be in a position to meet. Carrying out adequate research to budget for any loan and its corresponding repayments plus interest should help you determine whether you have the right attitude to debt.
When it comes to credit cards, providers do all they can to encourage you to start using their cards, with seemingly attractive offers on interest, but again, you need to read the small print each time and to be absolutely clear that you feel comfortable with actively seeking a credit card for future borrowings.
Having a good idea of your credit score is useful, as we found that 31% of respondents were refused some form of credit in the past, stopping them from seeking finance and drastically reducing their options when it came to paying for things.
Debt, when handled responsibly, by both borrowers and providers, can ensure that borrowers are able to maintain good credit scores, allowing them to invest in their homes or businesses, or simply seek finance if their incomes fall short for some reason. But seeking credit without a clear plan for repaying it back is an unhealthy approach, as providers might be falling over themselves to offer it to us, but we all have our limits financially and mentally. Always make sure you know yours when the time comes to seek credit.
Disclaimer: The market research was carried out among a sample of 2,004 UK-based adults in September 2019. The research was commissioned by NerdWallet through independent market research agency Opinium
Opinium is a member of the Market Research Society (MRS) Company Partner Collection Service, whose code of conduct and quality commitment it strictly adheres to. Its MRS membership means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicating with respondents; conducting fieldwork; analysis and reporting; data storage
The data sample of 2,004 UK adults is fully nationally representative. This means the sample is weighted by ONS criteria, so that the gender age, social grade, region and city of the respondents corresponds to the UK population as a whole.
Third-party data provided is based on information that is publicly available at the time of writing. NerdWallet does not accept, for any reason, responsibility for the content on third-party sites.
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John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more