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How bad credit affects mental health

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When financial strain sets in, whether it’s caused by a global pandemic or something else, your credit score can suffer. Paying bills late, running up high balances, opening several credit cards in a short time period because you’re short on cash can — all can cost you credit score points. If you’ve ever felt anxious because of the state of your financial situation, you know the impact carrying debt can have on your mental health.

Nearly one in five U.S. adults live with mental illness, according to the NIH, and almost a third of Americans have subprime credit (a FICO score below 670), according to Experian. For some of them, the long isolation of the pandemic, followed by inflation and rising interest rates on credit cards and loans, are making matters worse.

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

How does bad credit impact mental health?

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. Some 46 percent of people who have debt problems also have mental health problems, according to the Money and Mental Health Policy Institute, and 86 percent of people who experienced mental health problems said those were made worse by their financial situation.

You may develop unhealthy coping skills

When spending money is a coping skill, for example, that can be problematic mentally and financially. Overspending may help you relieve stress in the moment, but compulsive overspending will further impact your mental health and lead to more debt.

“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.

You might blame yourself when it’s out of your control

It’s important to remember that bad credit can also be the result of something that is beyond your control. Oftentimes financial difficulties hit unexpectedly. For example, if you find yourself in a situation where you are laid off from your job or forced to resign due to a health issue that needs your immediate attention, you may feel inclined to blame yourself. But it is important to take a step back and realize, whatever situation you may be facing, is simply out of your control.

How do finances impact your mental health?

According to the Kaiser Family Foundation, 4 in 10 American adults experienced anxiety or depression during the pandemic, up from 1 in 10 Americans in 2019. 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 by 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 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,” says Kristin Lobenstein, a financial coach with Jewish Family Service of Greater Dallas. “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,” says Rebecca Brooks, owner of R&D Financial Coaching.

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.
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