Debt and Mental Health: The Psychology of Being Debt-Free

People with high debt and poor mental health know it can be challenging to emerge from one without fixing the other. 

There's a connection between debt and mental health that can bring you down when you're buried in bills — but can also work in your favor once you’re debt-free.

And taking even small steps to reduce your debt pays psychological dividends.

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How Debt Impacts Your Mental Health

Debt isn't inherently bad. 

Student loans help people obtain a college education, which is statistically correlated with higher income. And the majority of Americans take out mortgages to become homeowners. 

But credit comes at a cost. Excessive debt has potential consequences to be mindful of before you borrow. 

Shame and avoidance

Struggling to repay debt is common. Of the 1,000+ Americans who responded to a 2022 survey by OppLoans, about a quarter considered their debt burden “unmanageable.” 

Debt can stem from circumstances beyond your control, like a medical emergency or a layoff. But despite the debt’s origin or ubiquity, you may feel like your financial issues are socially stigmatized. 

This debt stigma may lead you to adopt concealing behaviors, like overspending in social environments — which only increases your debt burden. 

A sense of shame may also prevent you from seeking help or taking steps to reverse your debt trajectory. But avoidance can lead to severe consequences, like legal action from creditors, the loss of property, and significant credit score damage.

Depression

A BMC Public Health assessment found that borrowers who miss multiple debt payments experience greater rates of depression and suicidal ideation than those who either don’t hold debt or meet their repayment obligations. 

The link between debt and depression may be reciprocal. Depression can be disabling, which may hinder your productivity and professional performance — aggravating your financial circumstances. 

Anxiety

Holding debt increases your likelihood of experiencing anxiety, which can disrupt your sleep, concentration, and interpersonal relationships.

A study conducted in Sweden found that the probability of self-reported anxiety is 25.2 percentage points higher among debtors of all mental health backgrounds than among those who don’t hold debt. 

Even debtors who have no other history of mental health issues are significantly more likely (14.1 percentage points) to report experiencing anxiety. 

How To Get Help With Debt

Psychological ailments caused by excessive debt can erode your quality of life. But they may also push you to seek help. 

Take these three critical steps to reach a stronger financial footing: 

1. Confirm what you actually owe

Start by figuring out if the amount of debt you’re told you owe is accurate. 

Contact your creditors and ask for written breakdowns of your account balances. If you’re being contacted by a debt collector, request a debt validation letter. 

This letter should include the name of the creditor you owe and an itemized list of the debt being collected, including interest and fees.

Apply particular scrutiny to medical bills, which frequently contain balance-inflating errors like duplicate charges or improperly coded services.

READ MORE: Should I Get a Personal Loan to Pay Off Credit Card Debt?

2. Talk to a credit counselor

A nonprofit credit counselor can help you assess your overall financial situation, create a realistic budget, and craft a debt repayment strategy. 

The initial financial review session with a credit counselor is free. 

Thomas Nitzsche, a financial educator for the nonprofit credit counseling organization Money Management International, says simply talking about your debt with a professional might alleviate some of your stress. 

“​Clients frequently mention that debt overtakes their lives and becomes the only thing they can think about,” says Nitzsche. “We have found that 79% of our clients report reduced stress after their very first counseling session.”

In some circumstances, the counselor may advise you to consider setting up a debt management plan (DMP), the cost of which won’t exceed $79.

Keep in mind that nonprofit credit counselors are not the same thing as for-profit “debt settlement” or “debt relief” companies, which are typically at least 10x as expensive as credit counselors and may advise you to take actions that damage your credit score. 

3. Meet with a mental health professional

When psychological stress is rooted in financial stress, you might be reluctant to add therapy bills to your expense sheet. 

But Nathan Astle, a financial therapist and founder of the Financial Therapy Clinical Institute, feels that the added line item is necessary in some circumstances.

“If your mental health issues are unmanageable, no amount of extra savings is going to fix them,” he says. “Sometimes therapy is simply the only option, especially when mental health challenges are interfering with your day-to-day functioning.”

And you might have free or affordable mental health resources at your disposal.

“If employed, we usually suggest you check with your company’s employee assistance program, which may offer free mental health services,” says Nitzsche.

Psychological Benefits of Paying Off Debt

Chipping away at debt helps your finances in many clear ways. It can: 

• Increase your credit score
• Reduce your debt-to-income ratio
• Open up room in your budget for saving each month 

But while the psychological impacts of debt repayment may be less explicit than the financial impacts, they’re just as — if not more — influential on your well-being.

Security

Astle says the single biggest benefit of paying off debt is that it helps restore our feeling of safety via changes to our brain chemistry. 

“Our amygdala, an emotional processing center in our brain, helps keep us safe by sending us into ‘fight or flight’ mode when we’re threatened. But it doesn't do a great job of distinguishing between physical danger and emotional danger,” says Astle. 

“So money stressors like debt get treated the same in our brains as physical stressors: They’re a threat to our security. Paying off debt may reduce some of that stress.”

And an overall sense of security improves other related aspects of mental health. 

“Feeling safe financially can influence how we respond to other stressors, affect our relationship quality and communication, and affect our self-esteem,” says Astle.

Simplicity

Carrying a large amount of debt is stressful in itself. But research also shows that the more creditors you have, the more mentally taxing your debt can be.

An experiment conducted in Singapore paid the same amount of debt off for two groups of borrowers. 

Debtors who had more accounts paid off in full experienced greater anxiety reduction and a bigger improvement in cognitive functioning than their peer group, even though all participants received the same amount of dollar-for-dollar relief.

These results strengthen the argument for using the snowball method of debt repayment, favored by Erika Taught Me podcast guest Dave Ramsey. 

With the snowball method, you focus on paying off your accounts with the smallest balances first, even if other accounts have higher interest rates. 

This helps set you up for quick victories and a simplified creditor spread — psychological boosts that Ramsey argues are essential in the fight against debt. 

Cautious momentum

Paying off debt frees up emotional and budgetary space to pursue other big financial goals, like setting up an emergency fund and saving for retirement. 

But a successful debt repayment campaign may also heal some of the psychological wounds that would otherwise make you hesitant to take on advantageous debt down the road.

“Our clients seem to understand the difference between ‘good’ and ‘bad’ debt,” says Nitzsche. “We frequently receive feedback that finishing their DMP allowed them to achieve homeownership or other goals that might require a loan.”

Nitzsche also notes that the scars of being in debt can create a lifelong but perhaps healthy aversion to high-interest debt.

“Conversely, many of our clients use ‘never again’ language when referencing future credit card debt.”

Ultimately, a traumatic debt experience could leave you with a healthy blend of debt hesitancy and resilience that will position you well for the rest of your financial journey.

READ MORE: How To Become Debt-Free: 6 Steps to Take Control of Your Debt

FAQs

What is a financial therapist?

A financial therapist works with clients to better integrate the “cognitive, emotional, behavioral, relational, and financial aspects of well-being,” according to the Financial Therapy Association (FTA). 

Financial therapists come from various professional backgrounds and may have expertise in a financial field, like financial planning, and/or a mental health field, like psychotherapy. 

Though some financial therapists are certified by the FTA, the use of the term “financial therapist” isn’t legally regulated. 

What is a debt management plan?

A debt management plan (DMP) is a plan for repaying unsecured debts. It is usually administrated by a nonprofit credit counseling agency and developed in consultation with the debtor. 

The agency negotiates with your creditors to reduce your debts’ interest rates and establish a monthly debt repayment amount that’s realistic for your budget. 

DMPs are a form of debt consolidation, in that you make one monthly payment to the DMP’s administrating agency, which then distributes that payment among multiple creditors. 

But fees paid for a DMP are typically much lower than fees paid for a debt consolidation loan.

TL;DR: How To Deal With Debt Stress

While it may be tempting to stick your head in the sand if you have overwhelming debt, avoiding the problem won’t make it go away. In fact, it will make it worse.

Instead, check the real amounts of what you owe, then make an appointment with a nonprofit credit counselor. And if debt is impacting your mental health, seek out a therapist — you may even be eligible for discounted or free sessions. 

Debt is nothing to be ashamed of and taking steps now to remedy it will make you that much stronger, both financially and mentally. 

For more tips on managing your money and your mental health, check out these episodes of the Erika Taught Me podcast:

• This Is Why You’re Feeling Burnt Out
• Get Past Your Money Mistakes
• How To Get Mentally Strong as an Adult

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