How Mental Health Is Affected By Bad Credit
The COVID-19 pandemic has taken its toll on the physical health of millions of people in the United States and around the world. And for many, there has also been an impact on mental health.
“COVID has made many people aware of their financial situation and has proven the importance of good financial health,” says Rebecca Brooks, owner of R&D Financial Coaching. “But stress and uncertainty have also led many people to feel a strong sense of scarcity and fear – avoiding debt, wanting to repay as much as possible, and increasing their emergency fund balances.”
When financial strains set in, whether caused by a global pandemic or something else, your credit score can take a hit. For example, paying late bills, racking up high balances, or opening multiple credit cards in a short period of time because you’re low on cash can all cost you credit points.
Almost a third of Americans have subprime loans, which means a FICO score below 670, according to Experian. For some of them, 2020 has proved difficult as lenders tighten standards on credit cards and loans.
Not being able to borrow money when needed can increase financial stress or lead to financial decisions that make bad credit even worse. Understanding the link between financial health and mental health is important when trying to improve both.
What Causes Bad Credit and How Does It Impact Mental Health?
There are different reasons someone can have bad credit, starting with low wages, says Kristin Lobenstein, financial coach at the Jewish Family Service of Greater Dallas.
“When someone can’t pay their bills, they turn to credit cards and payday loans to pay even their basic expenses,” says Lobenstein. “And if something breaks, like commuting to work or a cell phone, credit cards are the only way to survive and keep their jobs.”
Low income can lead to high debt levels or late payments, both of which can hurt credit scores. Bad money management habits unrelated to income can also be a culprit.
Thirty-five percent of your FICO credit score is based on payment history. If you usually pay credit cards, loans, or other bills late (or not at all), it can hurt your score. Likewise, having high balances or maxing out your cards can also hurt your score, as 30% of your FICO calculations are based on using your credit.
Lobenstein says not having a budget is a problem if it results in overspending. Likewise, failure to keep up with spending can lead to bad credit if it lands you in overwhelming debt. But it’s important to remember that bad credit can also be the result of things that may be beyond your control.
For example, let’s say you get sick or hurt yourself and you can’t work or you’re made redundant. If you don’t have a large emergency fund to rely on, it could put you at risk for late credit card payments and other bills. In this case, late or missed payments always results in bad credit.
Whatever the cause, bad credit can affect you financially in several ways. For example, bad credit can make it harder to:
- Get approved for new credit cards or loans
- Rent an apartment or get utilities on your behalf
- To buy a house
- Benefit from advantageous interest rates
- Being hired for certain jobs
If you’re trying to get ahead financially, bad credit can be a barrier to reaching your goals. It can harm your mental health if it makes you feel hopeless about your financial situation.
There is also a link between debt and mental health. According to the Money and Mental Health Policy Institute, 46% of people who have debt problems also have mental health problems. And 86% of people who experienced mental health issues said it was made worse by their financial situation.
When spending money is a coping ability, for example, it can be mentally and financially problematic.
“If you think what you buy is going to make you feel better, you’re more likely to prioritize expenses or debts incurred,” says Aja Evans, a New York-based licensed mental health counselor. Learning to develop healthy coping skills that are not dependent on spending money could help reduce the risk of getting into debt.
What is the impact of finances on your mental health and vice versa?
According to the Kaiser Family Foundation, 4 in 10 American adults suffered from anxiety or depression during the pandemic. This is an increase from the 1 in 10 Americans who reported anxiety or depression in 2019.
So what is behind this increase?
Part of the problem is the fear and stress associated with the virus itself and what it can mean to get sick. But isolation, job losses and the financial fallout from unemployment also affect the mental health of Americans.
Aside from the pandemic, poor mental health can be triggered by stress at work. A World Health Organization (WHO) study found that 264 million people worldwide suffer from depression and anxiety, costing $ 1,000 billion in lost productivity. The study cited stressors at work as a cause, including:
- Rigid working hours
- Inadequate health and safety policies
- Poor communication and management practices
- Limited control or participation in decision-making
- Unclear tasks
- Low levels of support for employees
An overwhelming workload and workplace bullying or harassment also contribute to a work environment conducive to mental health issues. You may feel pressured to go to work for a salary, but it comes at the cost of your well-being.
Then there is relationship stress. In a study from Indiana University, for example, 50% of participants reported experiencing depression related to the pandemic. And 50% also reported experiencing psychological assault (such as yelling and threats) from their partner. With money often cited as a source of arguments for couples, the pandemic can contribute to more frequent arguments and, as a result, more financial stress for couples.
It is important to tackle these issues to improve financial health.
“People who feel financially stable perform better at work and feel more confident in conversations and interactions with others,” says Lobenstein. “People in a relationship who have open conversations about money are happier in their relationships.”
Having a history of mental illness in your family can also impact your mental and financial health. Scientific evidence suggests that having someone with mental health problems in your family could increase your risk of developing a mental health problem yourself. This, in turn, could put you at a greater risk of encountering financial difficulties, which can lead to bad credit.
If you have mental health issues, or know someone who has, there are resources that can help.
How to improve your credit and reduce financial stress
Simply put, bad credit can keep you from moving forward or reaching your financial goals. Bad credit can make life more difficult financially and mentally, but it doesn’t have to be a permanent situation.
Sitting down and adding up your debts can be a step in the right direction. Once you know what you owe, to whom you owe it, and at what interest rates you are paying, you can formulate a realistic plan to pay off your debt.
This step can seem overwhelming, and it is okay to seek help. For example, a nonprofit credit counselor can look at your spending and debt, and then come up with solutions to manage them. It could be as simple as creating a monthly budget or it could involve signing up for a Debt Management Plan (DMP). Here are some options:
Evans says talking to someone can help ease some of the mental burdens you might feel about your financial situation. “Shame is one of the main culprits for negative feelings associated with finance. Saying out loud how you feel to someone you trust relieves some of the pressure you may be putting on yourself.
You can also explore options to rebuild bad credit over time. For example, opening a credit card for bad credit can help you build a positive payment history. It could make a difference in your credit score if you pay responsibly each month and keep your balance low.
The most important thing is to do something rather than nothing.
“There are many ways to start improving your credit, and by learning what to do and just taking action, your stress will decrease,” says Brooks.
The bottom line
Financial stress and poor mental health often go hand in hand. The COVID-19 pandemic may have increased your level of anxiety if you are struggling with debt or loss of income. Recognizing how financial worries can affect your mental health or vice versa can make it easier to find a solution to approach both in a positive way.