The Emotional and Psychological Effects of Bad Credit and How to Overcome Them

Updated: November 19, 2023 Author:

Key takeaways: If you are stuggling with the psychological effects of bad credit, speak to a professional who can offer you impartial advice.

Citisens Advice

StepChange Debt Charity

    Bad credit is something that can have a massive impact on a person’s life. A poor credit score can take some time to overcome, and on the face of it, some people look at their debt and poor credit score and think that there is no way out. This is not true, and the psychological impact pf bad credit may be severe, but there is support out there from both debt charities and mental health support charities

    What is bad credit?

    Every financial decision you’ve made in the past in terms of credit that you have repaid and debt that you have taken on is recorded in your credit file. This credit history is taken by the four main credit agencies in the UK, and a credit score is created based on your specific history. This considers how much debt you’ve taken on, how much you have borrowed, and your activity in terms of how and when you pay back your debt.

    The more debt you take on, and the longer it takes to pay off that debt, will lead to a worse credit score. If you are late making repayments or miss them altogether, this will also negatively impact your credit score. 

    Your credit score is looked at by lenders whenever you put in an application for any form of credit, whether you are attempting to secure a small personal loan, take out a new credit card, or seek a mortgage to buy property. A bad credit score will make it harder for acceptance for this credit or lead to higher interest rates applied to you. 

    Understanding the impact of bad credit

    Having a bad credit score doesn’t just mean you have a financial issue to take care of. There are broader emotional and psychological impacts that you need to consider and address. There are many reasons why you might be applying for credit, and it could be that you have a partner or a family that are tied in with you financially too. The stress of bad credit can lead you to feel negative emotions. If bad credit leads to credit applications being rejected, high interest rates causing you pain each month, and you can’t seem to get out of a cycle of bad credit and debt, you might feel anxiety, guilt, shame, and suffer depression as a result.

    Overcoming the emotional challenges that bad credit can present is crucial to you regaining control of your financial problems and your life. By taking the decision to ‘do something’ about your bad credit, you are taking those first steps to recovering your control and improving your overall psychological and physical well-being. 

    What are the common emotions associated with bad credit?

    The first thing you should do to deal with the psychological impact of bad credit is to understand the emotions that you are experiencing. The following are just some of the emotions that are felt by people with bad credit.

    Guilt and shame – a lot of people who have bad credit feel embarrassed about their debt and shame about the consequences of their financial situation. This is even more so if it is down to past mistakes that they would like to move forward from. 

    Anxiety and stress – bad credit leads to worry, which can go on to become constant worry and thoughts where you strive to consider your options to get out of a cycle of debt. Prolonged periods of anxiety cause chronic stress that can have an impact on you both mentally and physically.

    Low self-esteem – having poor credit can severely affect your self-confidence, making you feel like you are incapable of managing your own finances and life, and making you feel unworthy. 

    Depression – in the worst cases, all of the above can come together to cause depression. Poor financial situations that have escalated and seem difficult to get out of, can cause feelings of hopelessness and impact your mental health and lead to depression.

    How to cope with bad credit

    There are a few things you can do to begin coping effectively with having bad credit. Taking a methodical approach will help you to overcome the emotional challenges that you are facing. 

    Accept your situation – the first thing you need to do is to accept the financial situation you are in. Honesty is key to overcoming these challenges long-term and will help you to have a better grip on what it is you need to do to move forward effectively.

    Look for help – speak to your family, friends, colleagues, or seek professional support from a counsellor to talk through the negative emotions you are feeling. 

    Educate yourself – it is important that you research personal finance and credit management and educate yourself as to the ways in which you can take back control of your financial situation and grow confidence in your ability to manage your finances.

    Be realistic – create achievable, sustainable goals that will help you to pay back your debt and improve your credit score, without putting too much pressure and strain on your life. 

    Focus on the positive – with a clear goal in mind and manageable targets to meet along the way you can begin to focus on the long-term positives and financial stability that will come to you.

    How to improve your credit score

    Acceptance and seeking help is a good start to eradicating the negative psychological elements of having bad credit, but how can you improve your credit score?

    Review your credit file – you have the right to ask for access to your credit file from all of the credit agencies. Review this to find out exactly what is going on with your credit score and also to identify any errors or discrepancies that you wish to change or challenge.

    Pay your bills on time – this might seem obvious, but if you can regularly pay your bills on time, and with credit try to pay over the minimum payment each month if you can’t afford to pay the whole bill in one go.

    Be careful with credit card percentages – maxing out multiple credit cards is a good way to get bad credit. Make sure you don’t use up a huge percentage of any credit facilities you have access to. Instead, try to keep it below 30% of what is available to you.

    Register to vote – get on the electoral register and this will provide lenders with accurate information about where you live and that you are who you say you are when applying for any type of credit.

    Reduce your debt – look long-term to reducing your debt steadily over time. This will help improve your credit score in a viable way, showing you can manage your debt and get out of a cycle of bad credit.

    Importance of creating a budget

    One of the biggest things you can do when struggling with debt and bad credit is to create a budget. In fact, this should be one of the first things you do when faced with a bad credit score and mounting debt to pay off. A realistic budget helps you track your income, your expenses, and helps you to prioritise paying off your debts. If you are spending more than you are earning, or your debt is growing and you can’t afford to pay it off, create a budget and start changing your habits for the better.

    Be honest with your incomings and outgoings – look at all your statements and at what you spend and what is coming in each month. You must be 100% accurate at this stage to get anything out of creating a budget.

    What is the purpose of your budget? – decide what your budget is for. If it is to help pay off debt faster and improve your credit score, you can tailor what you spend around this target.

    Distinguish spending and debt – having a separate credit card/loan section of your budget helps you see what you need to spend and to realistically have enough to pay your credit card bills each month without getting into further trouble.

    Include one-off spends – despite having a budget don’t let this put you off also saving for a holiday, a birthday treat, or an anniversary gift. Account for these in your monthly budget as a one-off payment, and if the cost is spread over time, include the breakdown in each month’s budget.

    Seek professional help

    If you are struggling with bad credit and debt, and you are worried about how to get out of it, do not suffer alone. The psychological impact of bad credit can have a negative impact on your mental health and many different parts of your life. There are a few different mental health and debt charities out there, and organisations that can help you learn how to cope with the practical and psychological impact that poor credit and bad debt can have on you.