Credit Card Indebtedness and Psychological Well‐Being Over Time: Empirical Evidence from a Household Survey

Abstract

While a number of studies have investigated the relationship between debt and psychological well-being, none so far has explored if and how this relationship evolves over time. We seek to fill this gap in the literature by empirically analyzing the impact of household credit card debt on debt stress. Using cross-sectional data collected by The Ohio State University's Consumer Finance Monthly survey between August 2008 and December 2010, we construct a debt stress index and categorize households into three groups based on the length of credit card indebtedness. Our empirical results provide statistical evidence of time-varying impacts of credit card debt on stress levels. Specifically, we find that debt stress for short-run debtors is more than twice that of long-run debtors. The results are robust across a range of econometric specifications.Previous research by economists and psychologists has established a negative relationship between consumer debt and psychological well-being. 1 For example, Brown, Taylor, and Price (2005) find that outstanding non-mortgage credit adversely influences psychological well-being based on data from the British Household Panel Survey. Drentea and Lavrakas (2000) argue that because high credit card debt is often spurred by financial hardship (e.g., income loss or inadequate savings), it may prompt substitution away from what is deemed unaffordable "quality goods and services" such as healthy foods, at the expense of mental and physical well-being. Using a sample of Ohioans, they find empirical evidence for their conjecture; specifically, debt and debt stress are both associated with the worsening of self-reported health and 1. According to the World Health Organization (2001), psychological well-being is "a state of well-being in which the individual realizes his or her own abilities, can cope with the normal stresses of life, can work productively and fruitfully, and is able to make a contribution to his or her community." (2000) reports that anxiety increases with the ratio of credit card debt to income 2 ; Norvilitis et al. (2006) find that undergraduate students tend to simultaneously report a high level of credit card debt and a great amount of stress. Despite a substantial number of studies on debt and debt stress, to our knowledge, no previous analysis has sought to discern between the short-and the long-run psychological effects of debt.The key hypothesis tested in this article is that the impact of credit card debt on debt stress, an indicator of loss of psychological well-being, varies over time. Moreover, we are interested in investigating the direction of the change; does debt stress increase or decrease in the long run given unchanged indebtedness status? The rationale for this hypothesis is based on the theories of sensitization and habituation that are well known to psychologists but barely explored by economists. Habituation and sensitization refer to two interactive behavioral processes that result in either decreased or increased responsiveness to continuous sti...

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