Psychological factors involved in debt

9th May 2012

We recently read a 2007 briefing on “The Psychology of Debt” written by Professor Alan Lewis and published by Experian in October 2007. This timing of publication is interesting as this falls right around the time that the “credit crunch” began (one month after people were queuing up outside Northern Rock branches to withdraw their savings). In 2007/08 there were 13,667 personal insolvencies in Scotland, by 2011/12 this had increased dramatically to 20,217 personal insolvencies. The contents of this briefing may never have been so important as they are now.

It’s interesting to review the psychological factors behind debt suggested in this briefing (which was originally intended to help those engaged in collecting debt help improve their recovery rates). The information contained also seems to go a long way towards explaining why many people take so long to seek advice on their debts (a period during which the situation typically worsens).

One suggestion made is that people, “tend to compartmentalise their money into different mental accounts” which may lead to poor overall financial planning and therefore a lack of appreciation of the level of risks faced. Trust-Deed.co.uk advisers (and we’re sure all other debt advisers) may recognise this in effect from time to time. For example, some clients that are considering starting a protected trust deed tell us that they have a problem with their credit cards but their bank loans are fine. From a debt adviser point of view this is a red flag that the overall financial position may well be unsustainable.

Another suggestion is that people are “risk seeking for losses”. This is explained as being a lack of willingness to accept the reality of a debt level and to make the appropriate repayment arrangements, and instead to seek out riskier solutions that could make the situation worse rather than better. All debt advisers (and many people that have subsequently sought advice and entered debt solutions) will be familiar with this concept. Many people work exceptionally hard to move money between credit accounts, and to obtain new sources of credit, in an elaborate attempt lasting months or even years to manage their debt situation for today, but without any overall structure that will ever see the debts fully repaid (and which will in fact steadily make the situation worse).

It is also explained that financial decisions can be made on an emotional rather than a logical basis. Apparently 20% of the adults in the UK are “financial phobic” (of whom 45% feel anxiety about the situation), 15% are “immobilised”, and 12% are “physically ill” when they sit down to consider their finances. Such conditions make good decisions and sound financial management very difficult.

Clearly there are some aspects of human nature that make it easy to get into debt. The same psychological tendencies also often prevent people from seeking debt advice. People may determine that they can pay some of their debts so the overall debt problem isn’t especially significant, they can get through another few months so their advice needs aren’t urgent, or emotionally things have got so bad that they cannot think through their situation logically and embark on fixing the underlying problem.

There is no easy answer to the reality of our thought processes. From the perspective of Trust-Deed.co.uk debt advisers we simply want to share our experience of working with thousands of enquirers:

  • If your finances seem mostly OK, but you have a problem with a couple of debts, your finances probably aren’t OK at all (and things may get worse quickly if they aren’t dealt with). A debt adviser can logically break down the financial position for you and indicate whether you need to take action of any sort to prevent things worsening.
  • If you are managing to keep on top of your payments by moving money around different accounts, but you cannot envisage how your debts will ever be fully repaid, they’ll probably get worse rather than better. Once again, a debt adviser can provide you with a very straightforward analysis of your overall position and advise whether you’re actually in control or not.
  • If you cannot bear to think about your debts for any length of time, or they are affecting your health or wellbeing, it’s all the more important that you seek help. Good debt advisers are well aware that many of their clients have strong emotions connected to their financial position. Taking advice for the first time requires courage, but you should be rewarded with patience, understanding and a sympathetic ear.

For further information about debt and debt advice in Scotland please read around the information present on Trust-Deed.co.uk. In particular you may wish to visit our forum in which questions are asked by members of the public and answered by a panel of representatives from various Scottish insolvency firms.

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