To cut anxiety, aim for fewer debt accounts

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Reducing the number of debt accounts lowers the mental burden of people in poverty, research finds.

This step, in turn, improves psychological and cognitive performance and enables better decision-making, according to a new study.

Poverty interventions should aim to improve psychological and cognitive functioning in addition to addressing the financial needs of people in poverty, the study suggests.

“One challenge with poverty alleviation policies is the bedrock belief that the poor are indebted because of personal failings. Under this view, those who are trapped in poverty are believed to be lacking in desirable qualities such as motivation and talent that most of the Singapore population possess and value,” says coauthor Ong Qiyan of the National University of Singapore.

“However, our study shows that because debt impairs psychological functioning and decision-making, it would be extremely challenging for even the motivated and talented to escape poverty. Instead, the poor must either have exceptional qualities or be exceptionally lucky to get out of poverty. It is hard to be poor, harder than we thought.”

Debt relief

The study involved 196 chronically indebted low-income individuals who benefitted from the Getting Out of Debt (GOOD) program, which Singapore-based charity Methodist Welfare Services manages. This is a one-off debt relief program for households with monthly per capita income of less than S$1,500 (USD $1,108.13) and had outstanding chronic debts owed for at least six months. These debts included mortgage or rent, utilities, town council taxes, phone bills, and hire purchase debts. Before debt relief, the average monthly household income per capita of the participants was S$364 (USD $268.91).

The research team designed a comprehensive household financial survey that measures anxiety and cognitive functioning, as well as financial decision-making, of the participants. The researchers conducted the survey before the participants received the debt relief and three months after debt relief.

The study found that, three months after they received debt relief, the participants had experienced less anxiety and improved cognitive functioning, and they could make better financial decisions. Between two participants receiving the same amount of debt relief, the participant with more debt accounts eliminated showed more psychological and cognitive improvements.

‘Mental accounts’

These findings confirm that being chronically in debt impairs psychological functioning and decision-making. The findings also imply that people view each debt as a separate “mental account” and being “in the red” in many debt accounts is psychologically painful. Thus, thinking about these accounts consumes mental resources, increases anxiety, and worsens cognitive performance. This psychological impact may prevent low-income, indebted people from making the right decisions to get out of poverty, further contributing to the poverty trap.

Coauthor Walter Theseira, an associate professor at the Singapore University of Social Sciences School of Business, highlights the differences in how people in poverty and people who are not manage their debts and that the poor need more assistance.

“Although our study is based on the poor, many non-poor Singaporeans also have debts. Why are some people able to handle debts easily, while others find them stressful and taxing? One difference is that the non-poor have the financial resources to manage their debts conveniently and at low cost,” he says.

‘Decreasing the mental load’

“The findings in this study opens a pragmatic case for designing good debt relief programs for low-income households,” says coauthor Irene Ng, an associate professor from the NUS Faculty of Arts and Social Sciences.

“Firstly, they help. In fact, not helping low-income households with debt is counter-productive because not doing so leaves them in suboptimal functioning and high anxiety. Secondly, the design of the intervention is key. As it is the pile up of debt accounts (more than the amount of debt) that affects functioning, interventions should focus on decreasing the mental load on low-income households, whose minds are already highly stressed.”

The researchers suggest that policy interventions that streamline debts would significantly improve cognitive and psychological functioning, and reduce counterproductive behavior. For instance, restructuring or consolidating debt could be a more sustainable policy as it is less costly and more effective than simply clearing debt. More generally, poverty alleviation interventions should target and reduce the factors that contribute to the mental burdens of the poor.

The researchers are now examining the longer term effects of debt relief and are applying the insights from the study to find innovative solutions that may help people in poverty.

The findings appear in the Proceedings of the National Academy of Sciences.

Source: National University of Singapore