Debt and self-esteem: More is better—at least when you're young.

Commentary about business and finance.
June 19 2011 6:37 PM

If It Feels Good, Charge It

How more debt can lead to better self-esteem—but only if you're young.

Credit card. Click image to expand.
Do young people benefit from debt?

Being in debt improves your self-esteem—but only until you are 28, when it starts having the opposite effect. This is the conclusion of a group of sociologists who queried adults aged 18 to 34, analyzing their use of loans and credit and teasing out the effect of family income, educational achievement, and other characteristics. They found that debt gives a boost to both self-esteem and "mastery," a feeling of being in control, in people aged 18 to 27—the larger the debt, the bigger the boost—but that it erodes those two characteristics among people aged 28 to 34.

The simplest explanation for the phenomenon seems the most compelling: When you're young, credit cards and loans allow you to live beyond your presumably limited means. That cool apartment, awesome outfit, or expensive education can be yours with nothing more than a signature or a swipe of a card. And living large feels good.

Can a wallet-sized plastic card really make you feel that different about yourself? Well, an ample body of research does back up the idea that credit has profound psychological effects. "Credit cards effectively anesthetize the pain of paying," George Loewenstein of Carnegie Mellon explains. "You swipe the card and it doesn't feel like you're giving anything up to make the purchase, unlike paying cash where you have to hand over bills."

The sociologists who conducted the recent study, Rachel Dwyer and Randy Hodson of Ohio State University and Laura McCloud of Pacific Lutheran University, have a subtler explanation. They believe that the young folks might "experience debt as an investment in the future," particularly since they were often taking on credit-card and loan debt to finance their educations. The students felt better about their debt-financed employment and earnings prospects, perhaps, not their spending prowess.

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One way or another, the good vibes wear off. Debts mount with age. The stress and costs of paying off those debts mount as well. By the time young adults hit their mid-20s, they recognize the burden of debt as they try to pay off those expenses while working. The red ink ends up "challenging" young people's "self-concept … as they move through the life course with significant financial liabilities."

But the psychological effects of amassing debt differ, especially according to family circumstance. Young adults from wealthy families don't get the same self-esteem boost from having a credit card or taking out a loan as young adults from poor families do. They also show no debt-induced withering of self-esteem later on. "There are no significant effects of debt holding for the upper-class origin youth," the researchers say. "It is noteworthy that debt appears to have no effect only where other—often better—choices and fall-back positions are available." Indeed, the study found that the poorer the young adult, the stronger the psychological effects.

The research does not necessarily suggest that young folks should not take on debt—even if they take a hit to their self-esteem as well as their checkbooks down the road. Indeed, charging school supplies to a credit card or taking out a loan for a good education are often good choices for upwardly mobile young adults. Researchers debate the impact that a college or other post-secondary education has on earnings. But many believe that it is massive and lifelong.

Still, young folks do need to be savvy about charging their future selves to finance their current expenses. Indeed, the study's researchers suggest that young people experience a boost to self-esteem when they take on debt because they do not entirely understand that they'll be paying for it, plus interest, later on. (Young adults are infamously uneducated when it comes to personal finance.)

The silver lining is that the recession has forced young adults to become savvier. College isn't getting any cheaper, and more students are racking up more debt to attend. But fewer young people are signing up for credit cards. If young folks are making better financial choices for themselves—well, that's something everyone should feel good about.

Annie Lowrey is a contributing editor for New York magazine. She can be reached at annie.lowrey@gmail.com.

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