The psychology of debt

Phil Grady

Debt management research for Grant ThorntonReport

Peter CooperChartered Psychologist,

Associate Fellow British Psychological Society, Fellow Royal Society of Medicine, Fellow Market Research Society

CEO CRAM International

January 2010

• UK has accumulated debt totalling £1.45 trillion:– secured £1.236tr, £39,799 per household including Mortgage debt– unsecured £216bn, £17,825 per household

• UK Average household debt to disposable income is 161% - for every £1 of disposable income, household owes £1.61

• 2015 set to grow to £72,341 per household

• One in three UK adults have insufficient savings to survive a week without work

The story so far…

Size of the issue

• 1 in 4 adults is living with a mental health problem

• 50% of adults with debts have a mental health problem

• Grant Thornton research 2010 found 100% of clients who came to us had suicidal thoughts

“Time spent helping people address their debt problems can help their overall health and wellbeing, their financial management, and reduce their use of social and medical services”

Psychology of money

Money works like a drug:

• Rationally it is a tool to achieve goods but is much more than this emotionally and socially. – People use personal rules of thumb to take economic

decisions– Attention paid to immediate short-term than long-term

(‘money myopia’)– We are averse to immediate risk– We are influenced by what others do – Problem debt illustrates these psychological features in

extreme

Types of debt

Credit:Money that is agreed, under control, repaid regularly and used to benefit

Debt:Money that has not been paid and should have been but can be with more or less difficulty

Problem debt:Money that cannot be paid without a major changes of lifestyle and financial circumstances, and perhaps not even then

Acute problem debt:Problem Debt due to immediate often unexpected financial circumstances

Chronic problem debt:Problem Debt that is long-term leading to perpetual ‘debtor mentality’

Poverty debt:Long-term dependency on Social Security

Psychology of debt

Financialdebt

Psychologicaldistress

1. Financial debt creates psychological distress2. Psychological distress creates financial disorder3. The result is combined, unproductive financial and mental pressure4. People suffering require emotional understanding and not only

financial guidance in order to cope, plan and recover financially, emotionally, cognitively and socially

• Debt creates two main unpleasant emotions:

1 Anxiety - accompanied by Depression

2 Shame - accompanied by Guilt

How is debt affecting our clients?

People in debt fall into four main categories:

• Life Changing Event - unemployment, illness, divorce, bereavement. Numbers expected to rise due to Credit Crunch

• Identifiable neurotic personality profile - problems expressed through debt eg spending sprees

• Affluenza - ordinary people whose values distorted by modern life

• Poverty - people unable to break poverty trap

Types of people in debt

Debt psychologySymptoms

Physical/Somatic

• SLEEP

• APPETITE

• IBS:

• BLOOD PRESSURE:

• IMMUNE SYSTEM: weakened

• LIBIDO:

• SKIN:

• ABUSE: alcohol (smoking, drugs)

Psychological

• EMOTIONAL:

• COGNITIVE:

• SOCIAL:

• CULTURAL:

– stigma

– blame banks, government, immigrant groups

Gender conflicts

Males

• denial

• bury head in sand

• role of breadwinner

• failure as sign of impotence

• loss of pride

• frustration

• project anger at others to conceal self

• childlike regression

Females

• more overt

• emotional

• supportive

• some adopt mothering role

• effects on kids

• impacts on various roles of mother, partner, lover, shopper, gatekeeper, colleague

• guilt at not being aware earlier

Debt pathways

PRE-CRISISGrowth and ambition

TIPPING POINTSCONTACT WITH CAB (ONGOING CRISIS)

POST-CRISIS EXPECTATIONS –

STRUCTURED SOLUTIONS (eg IVA, pay off the debt, Bankruptcy) - Optimism

Time

Well being

Positive future: New lifestyle free from debt. But risk of regression to pre-crisis, repetition of past failures (re-offending)

DEBT PROGRESSIVE

DECLINE

Distress Debt

Progressive decline

Debt

Well being +

Denial

Anxiety

Depression

Loss of control

Somatic disorders

Family conflicts, guilt, anger

Distress

Advice tipping points

ActionAction

•Advice

•CAB

•Online search

•Grant Thornton contact

DenialDenial

• Ignoring bills

• Hiding from partner

• Escapism

•Loss of utilities threat of bailiffs

•Partner pressure

•No or limited income

•Paying redundancies, etc.

Realisation of need

Realisation of need

Living with debt “People don’t understand what it feels like until you go through it”, “you feel socially judged”,

“stigma”, “it’s as if it’s a disease”

“You loose focus”, “your head aches”, “I feel my head is being squeezed”, “my tummy turns”,

“like lead in my stomach”, “it’s all questions and no answers”

“I feel lost and hopeless”, “I’m drowning, suffocating”

“Desperate for help and support”, “to know where I

stand”, “to see light at the end of the tunnel”, “to have hope

and opportunity”

“Dark clouds, rain, storms”, “thunder,

lightning, terrifying”

“Being hunted in my own home”, “trapped inside”, “the walls are closing in”, “like being in prison”, “when debt knocks on the door”, “the phone calls never stop”, “being circled by sharks”

Pathological to adaptive coping

Pathological:

• Robbing Peter to pay Paul

• Denial, avoidance

• Borrowing more

• Juggling credit cards

• Keeping up false appearances

• Hiding problems from partner

• Depersonalises

Adaptive

• Download problems with understanding professional others (eg Grant Thornton advisors, CAB, some GPs, Social Workers)

• Involve Partner (family)• Develop insight into yourself• Modify beliefs (Cognitive

Behavioural Therapy – CBT)• Exert control over spending• Change Lifestyle• Develop achievable plans• Physical exercise• Control over diet and self-abuse