Credit Cards are the Most Stressful Debt

Debt is stressful. But did you know your stress level depends on the type of debt you have?

Credit cards cause far more stress than first mortgages and lines of credit, a study by Ohio State researchers finds. The more striking finding is that reverse mortgages, which allow people over age 62 to tap the equity in their homes, may reduce stress – at least temporarily.

The researchers used a simple example to illustrate the magnitude of credit card stress. Charging $640 on a card is as stress-producing as adding $10,000 to a mortgage. Credit cards are more stressful than home loans, because the balances on high-rate cards increase quickly when they’re not paid off, and the debt is not backed by an asset.

The researchers considered households to be debt-stressed if they said in a survey that they have had recent difficulty paying bills or have generally experienced financial strains.

This study focused on people over 62. As the share of older Americans carrying debt into retirement has increased, so have the amounts they owe. Debt arguably is very stressful for older workers, who have a dwindling number of years to get their finances under control before retiring, and for retirees, who have to live on fixed incomes.

The findings for reverse mortgages were nuanced – and interesting. Reverse mortgages create less stress than a standard mortgage and are much less stressful than consumer debt. On average, four years after taking out a reverse mortgage, the household’s stress level is 18 percent lower than it was at the time of the loan’s origination, according to the researchers, who did the study for the Retirement and Disability Research Consortium.

But things can change over time. Retirees often use federally insured reverse mortgages to pay off debt or as a regular source of income. But the amount owed on a reverse mortgage increases over time, because retirees do not have to make payments, and the interest compounds. (The loans are paid off when the owner either sells the house or dies.)

Further data are needed to confirm whether retirees’ stress levels increase as that reverse mortgage balance starts to rise. But the researchers said their findings are pointing in that direction.

“Debt-related stress is a growing concern,” they concluded, “given the growing amount of debt held by older adults as they enter retirement.”

To read the study, authored by Donald Haurin, Cäzilia Loibl, and Stephanie Moulton, see “Debt Stress and Mortgage Borrowing in older Age: Implications for Economic Security.”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.