How bad credit affects mental health

Vadym Pastukh/iStock/Getty Images
Bankrate Logo

Why you can trust Bankrate

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired.

The COVID-19 pandemic has taken a toll on the physical health of millions in the U.S. and around the world. And for many, there’s been a mental health impact as well.

“COVID has made many very aware of their financial circumstances and proven the importance of strong financial health,” says Rebecca Brooks, owner of R&D Financial Coaching. “But the stress and uncertainty have also led to many having strong feelings of scarcity and fear—avoiding debt, wanting to pay off as much as possible and increasing the balances in their emergency funds.”

When financial strain sets in, whether it’s caused by a global pandemic or something else, your credit score can suffer. For example, paying bills late, running up high balances or opening several credit cards in a short time period because you’re short on cash can all cost you credit score points.

Nearly a third of Americans have subprime credit, meaning a FICO score below 670, according to Experian. For some of them, 2020 proved challenging as lenders tightened standards on credit cards and loans.

Not being able to borrow money when needed can add to financial stress or lead to money decisions that make bad credit even worse. Understanding the link between financial health and mental health matters when trying to improve both.

What causes bad credit and how does it impact mental health?

There are different reasons someone might have bad credit, starting with low wages, says Kristin Lobenstein, a financial coach with Jewish Family Service of Greater Dallas.

“When someone cannot pay their bills, they look to credit cards and payday loans to pay for even their basic living expenses,” Lobenstein says. “And if something breaks, like transportation for work or a cell phone, credit cards are the only way to survive and keep their jobs.”

Low income could lead to high levels of debt or late payments, both of which can hurt credit scores. Poor 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 habitually pay credit cards, loans or other bills late (or not at all), that can be detrimental to your score. Likewise, carrying high balances or maxing out your cards can also harm your score, as 30 percent of your FICO calculations are based on your credit utilization.

Lobenstein says not having a budget is a problem if it results in overspending. Likewise, failing to track 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, say you get sick or injured and can’t work or you get laid off from your job. If you don’t have a sizable emergency fund to fall back on, that could put you at risk of falling behind on credit card payments and other bills. In that case, late or missed payments still lead to bad credit.

Regardless of the cause, bad credit can affect you financially in more ways than one. For example, bad credit can make it harder to:

  • Get approved for new credit cards or loans
  • Rent an apartment or get utilities in your name
  • Buy a home
  • Qualify for favorable interest rates
  • Get hired for certain jobs

If you’re trying to get ahead financially, bad credit can be a barrier to reaching your goals. That can harm your mental health if it causes you to feel hopeless about your financial situation.

There’s also a link between debt and mental health. According to the Money and Mental Health Policy Institute, 46 percent of people who have debt problems also have mental health problems. And 86 percent of people who experienced mental health problems said those were made worse by their financial situation.

When spending money is a coping skill, for example, that can be problematic mentally and financially.

“If you believe what you’re buying is going to make you feel better, it’s more likely that you’ll prioritize the spending or incurred debt,” says Aja Evans, a New York City-based licensed mental health counselor. Learning to develop healthy coping skills that aren’t reliant on spending money could help to reduce the risk of going into debt.

How do finances impact your mental health and vice versa?

According to the Kaiser Family Foundation, 4 in 10 American adults experienced anxiety or depression during the pandemic. That’s up from the 1 in 10 Americans who reported anxiety or depression in 2019.

So what’s behind the increase?

Part of the issue is fear and stress over the virus itself and what getting sick might mean. But isolation, job losses and the financial fallout from being out of work are also affecting Americans’ mental health.

Pandemic aside, poor mental health can be triggered by job stress. A study from the World Health Organization (WHO) found that 264 million people worldwide suffer from depression and anxiety, costing $1 trillion USD in lost productivity. The study cited on-the-job stressors as a cause, including:

  • Inflexible working hours
  • Inadequate health and safety policies
  • Poor communication and management practices
  • Limited control of or participation in decision-making
  • Unclear tasks
  • Low levels of support for employees

An overwhelming workload and on-the-job bullying or harassment also contribute to a work environment that’s ripe for mental health struggles. You may feel pressured to go to work to bring in a paycheck, but it comes at the expense of your wellbeing.

Then there’s relationship stress. In an Indiana University study, for example, 50 percent of participants said they’d experienced depression related to the pandemic. And 50 percent also said they’d experienced psychological aggression (such as yelling and threats) from their partner. With money often cited as a source of arguments for couples, the pandemic may be contributing to more frequent arguments—and more financial stress for couples as a result.

Addressing those issues is important for improving financial health.

“People who feel financially stable perform better at work and feel more confident when interviewing and interacting with others,” Lobenstein says. “Partnered people 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 struggles in your family could increase the risk of developing a mental health issue yourself. That, in turn, could put you at greater risk of encountering financial struggles, which may lead to bad credit.

If you’re struggling with mental health or know someone who is, there are resources that can help.

How to improve your credit and reduce financial stress

In simple terms, bad credit may prevent you from getting ahead or achieving your financial goals. Bad credit can make life more difficult from a financial and mental health perspective, 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, who you owe it to and what interest rates you’re paying you can formulate a realistic plan for paying down your debt.

This step may feel overwhelming, and it’s OK to look for help. For example, a nonprofit credit counselor can review your spending and debt, then offer solutions on how to manage it. That could be as simple as creating a monthly budget or it could involve enrolling in a debt management plan (DMP). Here are a couple of options:

Evans says talking to someone can help to ease some of the mental burdens you may feel about your financial situation. “Shame is a major culprit in negative feelings associated with finance. Saying how you are feeling out loud, to a trusted person, releases some of the pressure you may be putting on yourself.”

You could also explore options for rebuilding bad credit over time. For example, opening a credit card for bad credit can help you establish a positive payment history. That could make a difference in your credit score if you’re paying responsibly each month and keeping your balance low.

The most important thing is to do something, rather than nothing.

“There are a lot of ways you can start to improve your credit, and by learning what you need to do and simply taking action, your stress will decrease,” Brooks says.

The bottom line

Financial stress and poor mental health often go hand in hand. The COVID-19 pandemic may have elevated your anxiety levels if you’re struggling with debt or lost income. Recognizing how financial worries might be affecting your mental health or vice versa can make it easier to find a solution for addressing both in a positive way.

Written by
Rebecca Lake
Personal Finance Writer
Rebecca Lake is a freelance writer and blogger specializing in personal finance. Her interest in finance – specifically credit cards – began when she was struggling to pay off over $30,000 in credit card debt. With a passion for helping others make smart financial decisions, she started writing about finance in 2012 and since then has contributed to a number of highly-visible brands online, including, U.S. News & World Report, Citi Life + Money, Discover Modern Money blog, Bankrate, SmartAsset, Fox Business Network, Forbes Advisor, Magnify Money and Nerdwallet.
Edited by