Consumer Comeback Blog

The Psychology of debt

The financial implications of debt are relatively transparent.  It’s simple math, really.  But what is our psychological relationship with owing money?  With paying interest?  Why is it that we have an aversion to debt, and yet we allow ourselves to spiral into a financial hole so effortlessly?

Perhaps more importantly: for those who just can’t seem to get out from their debt, what mindset needs an adjustment in order to turn it around?

Psychology of spending

Debt always begins as spending, so I feel it’s more than prudent to start here.  Those who’ve found themselves with mountains of credit card debt probably got there by excessive spending beyond their means.  Whether it’s as simple as impulse control, or a serious mental illness like compulsive shopping, preventing and getting rid of debt starts with getting your spending habits under control.

Compulsive shopping

True compulsive shopping is a mental disorder called Oniomania.  And believe it or not, it affects men just as much as it does women:


The Psychology of Spending

Gender plays little role in compulsive shopping. For the most part, women do spend more, but the compulsion to shop and spend money is not inherently gender specific, despite the stereotype (according to some studies).  As the above video suggests, men hide their affliction as “collecting” better…

It is, however linked to a number of other mental disorders, such as depression, low self-esteem, stress, and even anger.  Psychologists believe that compulsive shopping can be triggered by the need to feel special or combat loneliness.  Emotionally deprived persons look to replace those missing emotions with the rush of buying things.  They get a temporary emotional lift and momentary euphoria while shopping and making purchases.  But when the shopping does nothing to satisfy these needs, the behavior can further escalate.

Treatment for compulsive shopping disorder usually includes professional therapy as well as group therapy.  Some communities also have credit counseling centers that offer help to shopaholics.  The first step, however, is identifying the problem.  If you’re here, the hardest part is done.  Next, you need to identify and face what triggers the urge to shop.  In the meantime, it’s definitely wise to take whatever steps necessary to prevent yourself from digging into a hole any further.  This means cutting up your credit cards and sitting down and coming up with a plan to take on the debts you’ve already incurred.

Impulse shopping

Impulse buys are purchase made without considering the consequences – shopping on a whim.  People who are prone to impulse shopping, however, don’t necessarily have other bad financial habits.  In fact, some impulse shoppers are well organized, have a set budget, and research most of their purchases; they simply can’t resist the temptation to buy something they suddenly want – for one reason or another.  The urge to make the purchase is stronger than any of the financial (or practical) reservations – and that becomes especially true when using credit.

Single large impulse purchases, like expensive cars or other luxury items are another type of impulse purchase that almost needs a category of its own.  Most of the time, credit is used to make such purchases which can pile debt quite quickly.  Larger purchases should also require more research and financial planning which is why they can quickly become a burden.

Unlike compulsive shopping, impulse shoppers aren’t looking to fill some emotional hole.  They simply lack the internal discipline to say no to themselves.  That’s why those with impulsive tendencies should be careful using credit cards and other types of debt – especially when going off budget.  The best way to reduce impulse shopping is to have some kind of budget that includes discretionary spending.  And all unplanned purchases should be paid for with cash only.  Most people (particularly impulsive types) tend to value cash in hand more than they respect the debts owed when swiping their credit cards.

Societal conditions

In this consumer driven age, society has changed our relationship with finances and spending. Advertising appeals to human emotional instincts in order to entice consumers to spend their money on things they don’t necessarily need. Creating emotional attachments to products is essentially the goal of branding and advertising.  And this relationship with money and products has changed drastically over the past 100 years or so.


The History of Splurging

As a result of such consumer driven cultural conditions, ownership of products and property has clear and difficult to avoid ‘status symbol’ implications.  Property not just determining self-worth, but becoming a projected self-worth on the rest of society.  And it’s contagious.

But as the above video suggests, during these harder economic times, frugality is starting to become more of a virtue again…

Buyers’ remorse

Buyers’ remorse is a form of anxiety that comes after making a purchase. Typically, larger purchases or those that may include a certain amount of extravagance can manifest a feeling of guilt and/or uncertainty. A large part of buyer’s remorse comes from the psychological effects of the lack of choice after making a purchase that they had while they were deciding. This then causes the purchaser to second guess their decision making processes which can result in guilt and anxiety over making the wrong choice.

It’s a type of cognitive dissonance that can lead to depression and other stress related issues in extreme cases.  And while it may seem like a beneficial state of mind for preventing over-spending, what’s most interesting about buyers’ remorse, is that it’s often extremely difficult to predict.

The Psychology of debt

Now that we’ve explored some of the inner workings of the psychology of spending, what can we learn about our mental state of mind when we are paying off debts?  From debt’s contribution to stress (and mental health) to the psychological rationalization we use when paying off debt accounts, borrowing weighs heavily on our psyche in ways that can be tremendously self defeating.

Debt and stress

It doesn’t take a scientific study to understand the relationship between debt and stress. But debt related stress in and of itself wouldn’t be so bad if stress wasn’t linked to a variety of other health issues (not just mental health). A study done in 2000 was the first of its kind to directly link credit card debts to physical health problems – brought on by stress.

“The stress of owing money, and knowledge that we’re paying high interest rates, may lead to increased stress resulting in worsening health.”

Financial security plays an important role in the level of debt related stress, as well.  Not just the overall amount of debt, but the debt to income ratio.  The closer a person is to having debts they can’t afford, the more stress those debts takes its toll.

It can be a self defeating problem, too.  Stress has a tendency to cause a person experiencing it to try and ignore the source, which only makes it worse.  The less you know about any particular problem, the more your brain copes by “alerting” you subconsciously to the threat.  What’s even worse, some people will cope with their stress by buying more, which only compounds the problem further. In other words: the more debt you have, the more you stress, the more you stress, the worse your debt problem will become.

Break the cycle.  Face your debt head on and develop a plan for paying it down.  Not just for your financial security, but for some piece of mind as well as your mental and physical health.

Debt account aversion

An interesting psychological phenomenon when paying down debts is something called “debt account aversion”. The basic principal is that for those with multiple debt accounts, instead of focusing on the overall debt picture, most tend to favor paying down the number of debt accounts as a priority. As a result, those in debt will focus on paying off the account with the smallest balance first, regardless of interest rates or other financial factors – many times to their own financial detriment.

The university of Michigan did a comprehensive study on the subject.  They concluded that there are a number of factors involved based on natural instinctive inner workings of our problem solving processes:

  1. When a problem is perceived to be difficult, we brake the problem into smaller sub-goals (accounts)
  2. We also tend to be more motivated for reaching our goals the closer we are to achieving them. (Goal-Gradient hypothesis)
  3. Diversity aversion – Where diversity is often valued for assets, it is aversive for losses and debts.  (a person would rather have 1 debt for $10k, than 4 at $2500 each)

The field studies found that a majority of the people who were given the task of paying down debts, paid off the smallest accounts first even though that lengthened the time it took to pay off the total debts as well as increased interest paid over the lifetime of the loans.

Some posit that the goal-gradient hypothesis could mean that debt account aversion can be a good thing.  The idea is that paying off smaller accounts first helps keep individuals motivated to pay off their debts rather than become discouraged altogether – and perhaps make matters worse.  But, according to the report, if interest rates are positively correlated with the size of the debt, such a tendency can only extend the timeline of your debt payment schedule, cost you money, and potentially cause further financial problems in the long-run.  It’s almost always better to pay down debts with higher interest first.

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