The Economic Psychology of Consumer Debt

Journal of Economic Psychology 14 (1993) 85-119 North-Holland

8.5

The economic psychology of consumer debt

Stephen E.G. Lea, Paul Webley and R. Mark Levine * University of Exeter, Exeter, UK

Received February 6, 1992; accepted August 31, 1992

Questionnaires were distributed to groups of people with either no debt, mild debt, or serious debt to a public utility company. Serious debtors were found to differ from the Non-debtor group on economic, sociological, and psychological variables: economic resources, economic need, social support, attitude forming variables and attitudes all made independent contributions to the prediction of group membership and the extent of self-reported debt. Mild debtors were generally intermediate between Non-debtors and Serious debtors. Debt was strongly correlated with economic factors. Many results indicated that debt is a consequence of adverse family economic conditions: Serious debtors were of lower socioeconomic class, had lower incomes, were less likely to own their own homes (and much less likely to own them outright), had more children and were more likely to be single parents. They were also younger. Social and psychological factors were also found to be related to debt: Serious debtors were less likely to claim Nonconformist, Agnostic or Atheist religious views, and they had slightly more permissive attitudes towards debt, although no group showed a general tendency to approval of debt. They knew more other people who were in debt, and they were less likely to think that their friends or relations would disapprove if they knew they were in debt. Multivariate analyses showed that economic, social and psychological variables all had independent correlation with debt. These results suggest that debt is stronly influenced by adverse economic circumstances, but that social and psychological factors are also important. The conditions for the development of a self-sustaining culture of debt do exist.

Introduction

Compared with many other kinds of economic behaviour, debt has been relatively little explored from a psychological standpoint. The

Correspondence too: S.E.G. Lea, University of Exeter, Dept. of Psychology, Washington Singer Laboratories, Exeter EX4 4QG, UK. * We would like to thank Welsh Water plc for their financial support for this research, and particularly Noel Hufton, Jeffrey Phillips and Wayne Rees for their interest and practical help. We are also most grateful to Nicola Crichton and John Hinde for statistical advice, to Cathy Walker and Emma Davies for background research and much discussion, and to an anonymous reviewer for much helpful advice. An earlier version of this paper was presented to the joint meeting of the International Association for Research in Economic Psychology and the Society for the Advancement of Socio-Economics, Stockholm, June 1991.

0167-4870/93/$06.00 0 1993 - Elsevier Science Publishers B.V. All rights reserved

86 S.E.G. Lea et al. / Economic psychology of consumer debt

extent of consumer indebtedness has caused some public and political concern (e.g. Leigh-Pemberton 1989), accompanied by speculation about its origins in individuals circumstances or attitudes. But only recently has there been any systematic study of the social and psychological background to debt (e.g. Berthoud and Kempson 1990, 1992; Ford 1988; Livingstone and Lunt 1992; Sullivan et al. 1989).

Some of this literature is more concerned with credit than with debt. Though the distinction is fuzzy, by credit we usually imply an arrangement to borrow money over some more or less defined period, with an assumption that repayment is within the borrowers means at all times. House mortgages and hire-purchase or instalment credit schemes fall in this category, at least at the point when they are arranged. In contrast, debt implies an obligation that the borrower is either unable to discharge or is trying to avoid discharging, at least at the time when it should be discharged. Thus credit implies a willing lender (often, indeed, the loan is made on the lenders initiative) while debt implies an unwilling lender. The early work at the Michigan Survey Research Center (summarized by Katona 1975: chapter 171 was mainly concerned with credit, in this sense, rather than debt. Ranyards (1988) theoretical analysis in terms of mental accounts is in the same area, and Livingstone and Lunt (1992), Berthoud and Kempson (1990) and Ford (1988) provide some of the empirical data base on which a modern theoretical analysis can build.

Most of the rest of the literature deals with the opposite end of the continuum, that is, with crisis debt. People who owe money that they ought to repay, and cannot repay it at the moment when they ought, may still be a long way short of being in a debt crisis. They may be justifiably confident that the debt can and will be discharged next payday; or they may just be putting off a payment that they could afford to make, in order to retain liquidity or even to maximize interest earned. Crisis debt arises when there is no prospect of paying off or even reducing accumulated debts, which are often increasing steadily. Its logical result is bankruptcy, which was indeed devised to limit the damage that individuals in debt crisis could suffer (Sullivan et al. 1989). Sullivan et al. and Corkish (in preparation) are dealing specifically with the causes of unmanageable debt, and Lehnert (1977) with its psychological consequences. The larger surveys (e.g. Berthoud and Kempson 1990; Ford 1988) of normal credit use also include some data on problem debt. Cameron and Golby (in press), in a study of

S.E.G. Lea et al. / Economic psychology of consumer debt 87

users of a debt counselling service, were able to look both at the causes and consequences of unmanageable debt.

From these studies, a picture is beginning to emerge. Almost everybody in modern western societies uses credit to some extent. In Britain, almost three-quarters of households had at least one credit agreement during 1989 (Berthoud and Kempson 1990). There are sharp national differences in credit use (Katona 1975: 282-283), and they would bear further investigation, but in any modern economy, it is almost impossible to avoid having either a house mortgage, a credit tariff for utilities, or a credit card. But people vary considerably in how acceptable they find even these agreed credit arrangements. They vary even more in how far and how often they make the transition from credit to debt or from debt to unmanageable debt.

The variables that are correlated with these transitions are not altogether clear. Some studies show clearly that debt in general, and unmanageable debt in particular, are problems of poverty. Sullivan et al. (1989) argue, from their study of court records, that people who go bankrupt are in the main ordinary Americans; they just happen to have lower incomes or larger expenses (with the same type of job and family situation) than the average, and fail to cope. Other studies show that borrowing increases with income and/or wealth (e.g. Ka- tona 1975; Livingstone and Lunt 1992), and that those with the biggest unmanageable debts have or had the highest incomes (e.g. Cameron and Golby in press). Many authors have argued that there is an increasing public acceptance of both credit and debt, leading to a culture of indebtedness which has dangerous social and economic implications (e.g. Leigh-Pemberton 1989). Those who have carried out empirical research, however, have generally argued that their results do not support this position (e.g. Sullivan et al. 1989). On the other hand, attitudes and other psychological variables do correlate with individual differences in credit use (Katona 1975; Livingstone and Lunt 19921, and Lehnert (1977) provides interesting psychological interpretations of a number of case histories of bankruptcy.

One of the difficulties in interpreting the literature is that most studies deal with either agreed credit or with unmanageable debt; the intermediate category of non-agreed but manageable debt has been very little investigated. There is a practical reason why this is so. Because most people borrow in some form, credit use can be studied through population surveys; at the other extreme, samples of crisis


debtors can be found through court records (e.g. Sullivan et al. 1989) or advice services (e.g. Cameron and Golby in press). Debt is both less frequent and less visible. It is also quite likely not to be acknowledged. Like many other behaviours which are either illegal or not fully socially acceptable, it is difficult to research by conventional surveys (Robins 1963). 0 ne of the few studies to have looked at this kind of ordinary debt is a study by Lunt and Livingstone (1991), and, significantly, this looks at the explanations people give of other peoples debts, not at individuals own experience of debt.

The present study looks at both crisis debt and at the more elusive category of non-crisis (but non-agreed) debt. It took advantage of an offer of co-operation from a major regional utility company, Welsh Water plc. The company is the monopoly supplier of water and sewerage services to approximately 1 million households in Wales (and in part of one neighbouring English county). They were thus able to supply us with random samples of up-to-date names and addresses of householders. Far more important, they were able to classify customers according to their credit status with the company, from those with no water debt to those with major debt problems. This meant that (with appropriate measures to ensure confidentiality), we could mail to relatively large numbers of people who were known to be in debt to different degrees; and we could test the truthfulness of peoples answers in a sensitive financial area.

The general aim of the study was thus to expand our knowledge of the natural history of debt. From the previous literature, it was clear that we could expect a large number of variables, some economic, some sociological, and some psychological, to be correlated with debt. An important question, however, is how far they make independent contributions. The data of Livingstone and Lunt (1992) suggest that the contributions of attitudes and economic variables are largely independent, but they dealt largely with credit rather than debt, and their measures of credit/debt depended on self-report. We wanted to see whether their results would be reproduced with a sample of including more people in more serious financial difficulties, and using objective measures of indebtedness. We classified the variables we considered as follows:

- Economic resources: Income, employment status, home ownership; - Economic need: Household size and constitution;


- Social factors: Behaviour and attitudes of people known to the respondents;

- Attitude-forming variables: Age and religion; - Attitudes (measured by a conventional psychological scale).

These classes of variables form a rough hierarchy from the economic to the psychological. From an economists point of view, even the most economic of them are fairly soft, since they were obtained by self-report, while from the psychological point of view even the most psychological of them are fairly superficial. However, since debt is an economic behaviour, the simplest and in a sense the most conservative hypothesis is that it will have economic causes, and any correlation with other variables will arise only as a result of mutual dependence. We therefore wished to test whether each successive class of variables had any independent effect after the previous class had been taken into account.

Method

Sample

The aim in sampling was to send questionnaires to 100 households in each of three credit status categories, in each of nine county areas (the eight administrative counties of Wales plus part of the county of Hereford and Worcester in England, which lies within the Welsh Water area). The three credit status groups were:

- Non-debtors: those with no outstanding debt to the company; - Mild debtors: those to whom a final demand (a second request for

payment following the normal bill) had been sent, and no payment yet received, but no further action had yet been thought necessary;

- Serious debtors: those against whom court proceedings for recovery of debt had been initiated.

The sampling procedure was as follows. Samples of about 150 were drawn at random by Welsh Water staff from the names and addresses of their customers within each county/credit category combination. Envelope labels for these customers were printed by Welsh Water and supplied to us. The county areas were obvious from the addresses; to protect confidentiality, the credit categories were identified only by


codes. We selected 100 labels for each code/county combination, largely at random but rejecting (i) addresses outside the county area, presumably those of absentee landlords, and (ii) any where the ad- dress was printed in an eccentric form which might have identified Welsh Water as the source of the labels, since we were anxious to avoid biasing the answers to questions about debts to public utilities. Different coloured questionnaires were sent to addresses bearing each code. For one code/county combination, only 40 labels were pro- vided. In all, therefore, 2640 questionnaires were mailed out. This represents about 0.25% of the households in the Welsh Water area.

After all questionnaires had been mailed out, surplus labels were shredded, and Welsh Water then informed us which credit categories corresponded to each code. As an added measure to ensure confidentiality, none of those handling the questionnaires had any substantial current connection with Wales, and in fact none of us recognised any of the names or addresses used.

Questionnaire

The questionnaire consisted of a 4-page A4 leaflet. It contained: (a) A question about the respondents current financial position, to

be answered on a 5-point rating scale, followed by questions about current debts to ten likely creditors, to be answered on a 4-point rating scale from None to Over &500; to allow a check on the sampling procedure, debt to The water company was included in this list. The ten creditors are shown in Figure lb. Note that money- lender, one of the creditors used, in everyday British English implies a specialist (and often not very respectable) trader, not a bank or other general financial business.

(b) Questions about how urgent it would be to repay a debt to the same ten creditors, and what the respondent had in fact done when last asked for repayment by them; plus three questions which between them gave the respondents order of priority for repayment to the four public utilities (gas, electricity, water and telephone).

(cl Questions about whether other people had told the respondent they were in debt, about the reaction they would expect from others who knew the respondent was in debt, and about people or organiza- tions they had spoken to about any current debt.

(d) Twelve questions exploring attitudes to debt, spending and saving in general, intended to serve as a pilot towards the develop-


ment of a full debt attitudes questionnaire. These questions are listed in Table 1. They were to be answered on a l- to I-/-point scale from Very strongly agree to Very strongly disagree.

(e) A page of questions about the social, demographic, occupational and economic status of the respondent and his or her household.

All questions were asked in as colloquial a style as possible.

Procedure

The questionnaires were distributed along with a letter which invited the recipient to participate, explained the purposes of the research, and gave assurances about confidentiality. Recipients were invited to write to the researchers if they wanted information about the results of the research. To avoid biasing the answers, the letter made no mention either of the support being given by Welsh Water, or of the selection of recipients by credit categories. A Freepost (reply-paid) envelope was enclosed for the return of the questionnaire. The county area to which the questionnaire had been sent was written on the outside of this envelope. Although a minority of the Welsh population have Welsh as their first language, all materials were distributed in English only.

The selection of recipients was made in February 1991, and questionnaires were mailed in early March 1991. When the questionnaires were returned, they were datestamped and numbered, and the county area from which they came was written on them. The replies to questions about occupation were coded, using the Hall-Jones scale of occupational prestige (see Oppenheim 19661, to give social class categories. Data analysis was carried out using the SPSS, Minitab and LIMDEP packages. Although most of the variables were essentially ordinal, all data were first examined, and their statistical significance was tested, using categorical procedures, in case there were any non-monotonic relationships.

Results

Return rates

The number of usable questionnaires returned was 420, of which 203, 127 and 90 came from the Non-debtor, Mild debtor and Serious

92 5. E.G. Lea et al. / Economic psychology of consumer debt

debtor categories respectively. After allowing for questionnaires returned as undeliverable by the post office, the return rate was 16% overall, and 23%, 14% and 11% in each credit category. There were no substantial differences in return rate between county areas. Adjust- ing for the fact that the two debt groups are minorities within the population, these return rates would correspond to an approximately 21% return from a random sample of households. The proportion of male respondents was 56%. Four respondents wrote separately, re- questing information about the results of the research. One tele- phoned to complain about being contacted; one returned a defaced questionnaire, and ten returned completely blank forms, presumably also a form of protest.

Many questionnaires lacked answers to some questions. In the analyses that follow, all available data for each question have been used, even if the questionnaire was incomplete in other respects.

There was no obvious multimodality in the distribution of return lags. Accordingly, those questionnaires that were returned after more than 11 days were classified as late, and used as a model for non-returns (cf. Oppenheim 1966). They constituted 38% of the total usable returns, including 37% of the Non-debtor group, 43% of the Mild debtors, and 33% of the Serious debtors.

Manipulation checks

Figure la shows how respondents described their financial position. Non-debtors showed a symmetrical distribution across the response categories while Mild and Serious debtors showed increasing skew towards the Very difficult.

Figure lb shows the responses to the questions about current debts. The leftmost bars show reports of debts to The water company, which was used as a check on the sampling procedure and the respondents truthfulness. In the Non-debtor category, only 10% reported that they owed money to the water company; this figure rose to 32% for the Mild debt group and 72% for the Serious debtors, The answers to the questions about debts to other creditors showed striking correlations. In the Non-debtor group, 66% claimed to owe nothing to any of the nine listed creditors, other than the water company (note that the questionnaire indicated explicitly that we were only calling a mortgage a debt if payments were overdue). The

S.E.G. Lea et al. / Economic psychology of consumer debt

Subjective financial position 50%

40%

30%

20%

10%

0% Very difficult Just coping Could be better About right Very healthy

Subjective financial position

m No debt @8 Mild debt a Serious debt

Self-reported debt

and credit group

m No debt @88 Mild debt a Serious debt

% with debts to

93

Fig. 1. Validation of the credit groups manipulation: credit group related to subjective (a) financial situation and (b) self-reported debt.


corresponding figures for Mild and Serious debtors were 36% and 16%. The creditors to whom most respondents were in debt were credit card companies (37% acknowledging some debt, 11% for over X500); fewest acknowledged debt to a close friend (5%, 1% for over fSOO>.

Repayment

Figures 2 and 3 show responses to questions about how urgent it would be to repay a debt to ten possible creditors. Here there are rather few differences between credit groups. We also asked what people had done on the last few occasions when they were asked to repay money by the same ten creditors. For the water company, the modal responses of the Non-debtor group was I paid up immediately (43%), while for the debtors it was I waited for the final demand (Mild debtors, 54%; Serious debtors 66%). Scoring I paid up immediately as 4 and I didnt repay it as 1, the mean immediacy ratings for repaying the other nine creditors were 3.0, 2.7 and 2.4.

Figure 4 shows the rankings of the urgency of repaying the four public utilities in the three credit rating groups. These rankings showed fair consistency (Kendalls W coefficient of concordance = 0.32 for the sample as a whole, and 0.32, 0.36 and 0.27 for Non-debtor, Mild debt and Serious debt groups). For all three credit status groups, most urgency was attached to repaying an overdue electricity bill, and least to a telephone bill; gas and water bills were intermediate, with slightly more urgency attached to the gas bill.

First order differences between credit rating groups

Unless there is a specific comment to the contrary, all group differences described here reached at least the 0.05 significance level, using chi-squared tests. The differences meeting this criterion are listed in Table 2, which also reports the actual significance levels reached.

Economic resources

We have already reported the differences between credit groups in the subjective financial strain they reported. Figure 5 shows that more


Urgency of repaying different creditors (1)

Welsh Water

Mortgage or rent 707.,

Electricity board

Urgency Ol repayment

I No debt !Tm Mdd debt 0 srnova dab,

British Telecom

TV rental

95

Fig. 2. Distributions of reported urgencies of repaying creditors in the three credit rating groups (1): Utilities, housing, and TV rental.

specific measures of economic resources showed similar trends. Fam- ily income was asked for directly on the questionnaire (in the broad categories used in the figure); both debt groups reported lower income than the Non-debtors. Occupational status was deduced from


LJrgency of repaying different creditors (2)

Welsh Water

Fami1.y

Credit card

Close friend

Money lender

Fig. 3. Urgencies of reported urgencies of repaying creditors in the three credit rating groups (2): Family, friends, credit cards and moneylenders.

questions about the occupation (or past occupation) of members of the household. Wherever possible, respondents were classified even if not currently economically active, and those who could not be classified were dropped from the present analysis. Although distributions of


Priorities for repayment Electricity board British Gas

97

Fig. 4. Distributions of priorities for repayment of a hypothetical debt to four utilities in the three credit-rating groups.

socioeconomic class for all three credit categories were bimodal, both debtor groups clearly tended to lower occupational classes than the Non-debtors.

Housing conditions also showed marked variation (Figure 6a). The three main categories represented were outright ownership, ownership through a mortgage, and renting from the council (private renting is probably underrepresented in the sample since in many cases landlords would be responsible for water charges). Among the Non- debtors, the modal category was outright ownership (50%), among Mild debtors it was ownership via mortgage (53%), while among Serious debtors it was council tenancy.

Economic need

The questionnaire items that were intended to reflect economic need asked about the marital status of the respondent, and the number of adults and the number of children present in the household. There were no significant relations between credit category and


Annual family income and credit group

30%

20%

10%

0%

30%

25%

20%

15%

10%

5%

0%

L

under L5000 L5000-L10000 L10000-Ll5000 L15000-L20000 over L20000

Annual family income

m No debt &8 Mild debt m Serious debt

Socio-economic class and credit group

m No debt k88$ Mild debt a Serious debt

Fig. 5. Economic resources: distributions of reported income and occupational class in the credit groups.

60%

50%

40%

30%

20%

10%

0% Owned outright Mortgage

S. E. G. Lea et al. / Economic psychology of consumer debt

Housing type and credit group

99

Private rent Council rent Family/friends

Housing type

m No debt m Mild debt a Serious debt

Children in household and credit group

60%

40%

20%

0% m None 2 3 or more

Number of children in household

m No debt m Mild debt / Serious debt

Fig. 6. Economic resources and economic needs: distributions of (a) housing status and (b) numbers of children in household in each credit group.


either marital status or the number of adults, though the two debtor groups were somewhat less likely to be either married or living with a partner, and more likely to be in households with one or three or more adults rather than two. However, there were marked differences in relation to the numbers of children in the household (Figure 6b). The mode for all groups was none, but childless households accounted for 75% of the Non-debtor group, 54% of the Mild debtors, and only 32% of the Serious debtor group, while those with 3 or more children accounted for l%, 11% and 19% of the three groups respectively. Although the number of adults in the household did not have a significant effect as such, a variable constructed from it did. We coded the 35 respondents who reported one adult and at least one child in the household as single parents. They formed 5% of the Non-debtors, 6% of the Mild debtors, and 19% of the Serious debt group.

Social support for debt

Questions addressing this factor asked about the attitudes of other people known to the respondent towards debt, either their own or the respondents. We asked, Have any of your family, friends or relations told you they are in debt ? Responses are summarized in Figure 7a. Most of the Non-debtor group (53%) responded None; for the Mild debtors the modal response was a few, and for the Serious debtors, it was nearly all. We also asked how respondents thought their friends and relations would react if the respondent told them that he or she owed El00 or more to a public utility company. Responses to this question are summarized in Figure 7b. The modal response from Non-debtors was They would think it odd and not understand, while from Mild and Serious debtors it was They would understand but think it unwise. The proportions giving the response They would think it normal were much higher for the Serious debt group than for the other two. As regards consulting other people or agencies about debt, the one most often consulted was a member of your family (18% of all respondents, including 28% of the Serious debt group). The local council were consulted by fewest people (6% of all respondents and 13% of the Serious debt group.

Attitude-forming variables

We considered the following variables that might have been expected to contribute to the respondents attitude towards debt: gen-


60%

50%

40%

30%

20%

10%

0%

Other people and debt

Are other people you know in debt?

Several Nearly all

People you know who are in debt

Others attitudes if you had debts of LlOO for electricity, water or gas

60%

50%

40%

30%

20%

10%

n4. rhaapprore Not understand nderatand but... nmlc it norms,

Attitude of friends/family

m No debt m Mild debt 0 Serious debt

Fig. 7. Social support for debt in the three credit groups: distributions of (a) numbers of other people, known to the respondents to be in debt and (b) expected attitudes of others if they knew

the respondent was in debt.

der, age, and religious affiliation. In addition, of course, the variables we have considered as antecedents of debt may in fact have their effect by way of changes in attitudes. Gender had no significant effect,


but there were significant effects of age and reported religious affiliation (Figure 8). Although the Age effect is not completely straightfor- ward, both debt groups were substantially younger than the Non-debtors. In all credit categories, the modal religious affiliation claimed was Anglican, but in the Non-debtor group, there were elevated proportions of Non-conformists and Agnostics/Atheists. Numbers of Roman Catholic and Other responses were correspondingly higher in the debtor groups. Only one respondent claimed to be Moslem and none to be Hindu, suggesting that there was a low rate of return from ethnic minority communities.

Attitudes to debt

Using the total sample, Cronbachs (Y for the 12-item scale was found to be 0.70, indicating an acceptable degree of scale homogene- ity. Table 1 shows that all but two items (Big companies can look after themselves and A credit card is a ticket to careless spending) had at least moderate correlations with the total of the remainder. Although the (Y value could have been improved marginally by drop- ping these two items, in the interests of retaining a broad approach to debt attitudes (and because a full psychometric investigation is planned for later in the research programme), all items were retained. Since the overall sample is not population-representative, being over- weighted with debtors, the reliability analysis was rerun on the Non- debtor group alone; the results were essentially unchanged. Principal components analysis of the responses to the 12 items produced only three components with eigenvalues greater than 1 (3.13, 1.91 and 1.06). The first component could be identified as an approval of debt measure, with all items loading appropriately on it; no interpretation of the other two major components was possible. It was therefore judged appropriate to use the 12 items as a scale of attitudes towards debt. Figure 9 shows the mean scale scores for the three respondent groups, scoring Very strongly agree as 1 and Very strongly disagree as 7. Clearly all groups tend to disagree with pro-debt statements, but disagreement is weaker in the debt groups.

Multivariate analysis

Dependent variables We attempted to predict four measures of indebtedness: the credit

rating group; whether or not the respondent reported any debt; and

S. E. G. Lea et al. / Economic psychology of consumer debt

Age and credit group 35%,

20%

15%

10%

5%

0% under 25 25-34

60%

50%

40%

30%

20%

10%

0%

Religious affiliation and credit group

Roman Catholic Anglican

I 55-64 65-74 75 and over

Age group

m No debt m Mild debt m Serious debt

Non-conformistAgnostic/Atheist Other

103

Religious affiliation

m No debt m Mild debt u Serious debt

Fig. 8. Attitude-forming variables: distributions of age and religious affiliation in the three credit groups.


Table 1 Items used in the debt attitudes scale, together with scoring key and item-total correlations.

Item Scoring Item-total correlation

a if item deleted

Most people buy too much on credit I am careless with money It is better to save before rather than

+ 0.29 0.69 _ 0.40 0.67

after buying expensive things + 0.51 0.66 I do not like being in debt + 0.26 0.69 If youve got money you might as well spend it _ 0.43 0.67 I find it hard to keep track of my money - 0.30 0.69 Debts should be repaid as soon as possible + 0.48 0.67 Big companies can look after themselves _ 0.07 0.72 A credit card is a ticket to careless spending + 0.17 0.71 I put money aside on a regular basis for the future + 0.45 0.66 It is OK to be in debt as long as you pay off

the debt in the end It is important to live within ones means

_ 0.35 0.68 + 0.45 0.67

for those who did report some debt, two measures of its severity, scored as follows. The first measure emphasised the breadth of indebtedness, by scoring each creditor from 1 (no reported debt) to 4 (debts of over &SO0 reported), and totalling these scores across the 10 creditors. The second measure emphasised the depth of indebtedness, by replacing these ordinal scores by midpoints of the answer categories (0, f50, &300 and flOO0 respectively) before summing. The two measures are referred to below as the breadth and depth measures of self-reported debt. Because many respondents failed to answer one or two questions, the effective sample sizes for the analysis of credit- rating group is reduced to 332; it was substantially lower for the self-reported debt analysis, with only 253 usable responses. Of these, 143 reported some debt, so this was the sample size for the third analysis. Prediction of credit-rating group was carried out by ordered logit analysis, prediction of the presence or absence of self-reported debt by logit analysis, and prediction of level of self-reported debt by multiple regression.

The ten potential creditors listed on the questionnaire were a somewhat heterogeneous group, so the responses to these items of those respondents acknowledging some debt were subjected to reliability and principal components analysis, before and after converting

SE. G. Lea et al. / Economic psychology of consumer debt 105

Attitudes toward debt 1 =strongly disagree, 7=strongly agree

Agreement with pro-debt statements

I , No debt

I

Mild debt

I /

Serious debt

Credit group

Fig. 9. Attitudes towards debt: mean scores for agreement with a pro-debt attitude on the 12-item scale.

ordinal scores to range midpoints. Reliabilities were unimpressive (Cronbach cy values of 0.45 for both measures). However, in both cases there was a strong first principal component which loaded positively on all items but one item (eigenvalues 2.84 and 2.31 for the two measures; the anomalous items were debts on credit cards for the breadth measure and on TV rental for the depth measure>. No subsequent component suggested an interpretable grouping of creditors for either measure.

Independent variables Only the predictor variables listed in Table 2, which had been

shown to have a significant first-order effect, were included in the

106 S. E. G. Lea et al. / Economic psychology of consumer debt

Table 2 Summary of differences between the three creditor categories. Only differences significant at at least the 0.05 level are shown.

Variable

Income Socioeconomic

status Household financial

position

Housing

Children in household

Single parents Number of

friends/family who are in debt

Attitude of friends/family to respondents debt

Age Religious

affiliation

Attitudes towards debt

Debts to other creditors

Tendency of debtor groups

Lower Lower status

More difficult

More council tenants, fewer own houses outright

More

More More

Less disapproving

Younger Fewer non-

conformists, atheists and agnostics

Less unfavourable

More, have at least one

x2

18.02 33.53

100.14

95.56

66.20

16.75 68.74

49.24

65.80 23.14

62.40

F df (Y

8 0.05 14 0.01

8 0.00005

6 0.00005

6 0.00005

2 0.0005 6 0.00005

6 0.00005

14.93 2,377 0.0005

2 0.00005

12 0.00005 8 0.01

multivariate analyses. In some cases categories were combined because group sizes would otherwise have been too small. The final list of variables used is given in Table 4. They include 7 ordinal or dichotomous variables, and three variables (housing status, age, and religious affiliation), represented by 3, 4 and 2 dummy variables respectively, making a total of 16 regressors.

It is to be expected that data from a study of the present sort will show intercorrelation of the independent variables. It is therefore important to test whether there is sufficient multicollinearity between


the variables to invalidate the results. The 15 variables listed in Table 4 were therefore submitted to principal components analysis. The analysis yielded only 6 factors with eigenvalues greater than 1.0, implying some degree of redundancy between the variables. However, when each of the variables in turn was regressed against all the others, the maximum value of R*-adjusted obtained was 66%, implying that none of the variables is unduly dependent on the remainder.

Hierarchical analyses

For each dependent variable, a hierarchical analysis was used, which investigated a series of groups of variables in turn. The variables were entered into the analysis in the groups listed in the introduction and used in the presentation of first-order effects (Eco- nomic Resources, Economic Need, Social Support for debt, Attitude- forming variables, and Attitudes), in that order. This analysis assesses the influence and statistical significance of each group given that all previous groups have already been taken into account. Table 3 gives the results. For each analysis, the significance of the improvement of prediction made by adding each group of variables can be tested, approximately, by using a chi-squared test based on the resulting increase in log likelihood ratio for the logit models and the usual F test for the multiple regression analyses. The table shows that adding each successive group of predictor variables had a significant effect on both measures of the presence of debt, but the attitude-forming variables did not significantly improve the prediction of either measure of the extent of self-reported debt, and the economic need variables made no significant improvement to the depth measure. Note that despite these statistically significant trends, the increases in predictive success on adding more variables are small, especially for credit-rating group. In some cases adding more variables even reduces the numerical success in prediction, though the significant results of the log-likelihood ratio test mean that the evidence in favour of misclassifications, or against correct classifications, must have been reduced. If the aim is to predict membership of these actual categories, rather than using them as indices of indebtedness, the most successful model would include fewer variables; the most effective model uses as predictors only income, renting (or living with friends


Table 3 Results of multivariate analyses: (a) Hierarchical analysis. Each row shows the effect of adding a group of variables to the predictor set while retaining all those given above. Entries under success give the proportion of individuals correctly categorized after adding the new group of variables for the first two analyses, and the R*-adjusted value for the third. x2 and F statistics test the significance of the improvement in predictiveness produced by adding them.

Predictor group (with increment

Credit-rating Self-reported debt Extent of debt reported

and residual (df) Success x2 Success x2 Breadth Depth

measure

Success F CR*-adj.)

measure

Success F (R2-adj.)

Economic resources 58% 92.12 71% 45.56 8% 4.09 = 9% 4.64 b

(4,139) Economic need 60% 15.30 c 71% 6.13 a 9% 1.75 9% 0.53

(2,137) Social support for

debt 61% 10.29 74% 33.30 c 20% 10.48 c 15% 6.30 b

(2,135) Attitude forming

variables 60% 12.47 77% 17.81 b 23% 1.96 18% 1.83

(6,129) Attitudes 59% 6.56 a 79% 6.15 a 28% 8.54 b 21% 6.15 a

(1,128)

a p < 0.05; h p < 0.01; = p < 0.001.

etc.) as against owner-occupancy, number of children in household and a simple age breakdown into those above and below age 55. This reduced model successfully categorizes 63% of the respondents. The models reported in Table 3, however, would be expected to be better predictors across a full range of levels of indebtedness.

Simultaneous analysis

To locate these effects more precisely, we looked at the situation after all the variables had been entered simultaneously, so as to assess the influence and significance of each predictor in the presence of all others. Table 4 shows the results. The entries are regression coefficients, that is to say, they show the effect on the dependent variable of a unit change in the predictor. Because both the predictors and the

S.E. G. Lea et al. / Economic psychology of consumer debt 109

Table 4 Results of the multivariate analyses: (b) Overall analysis. Entries in the main body of the table are regression coefficients for each predictors independent contribution to the dependent variable. Positive coefficients indicate an increasing tendency to indebtedness for increasing values of the predictor.

Predictor Dependent variable

Credit rating of

Existence self-

Extent of self- reported debt

grow reported l-l.+ Breadth F;L measure

- Economic resources Family income Occupational class Housing (difference from mortgage) Owned outright Rented or living with family or

friends

- 0.281 a 0.007

- 0.735 a

0.987 b

Economic need Children in household Single parent

0.430 c 0.153 0.284 63 - 0.241 1.507 0.496 7

Social support for debt Number of family or friends in debt Attitudes of others to respondents

debt

0.270 =

0.093

Attitude forming variables Age (differences from 35-44): under 25 25-34 45-54 55 and over Religion (differences from

Anglican): Roman Catholic or other Non-conformist, agnostic or atheist

1.137 16.030 0.272 1.564 b 0.818 a - 0.030

- 0.027 - 0.244

0.428 - 0.281

Attitudes 0.477 =

Cases included (N) Overall x2 (14 df) Overall Rz-adj. Overall F (14, N-15 df)

332 253 137.17 = 108.94

a p < 0.05; b p < 0.01; c p < 0.001.

-0.152 - 0.040

- 0.532 a -65 - 0.456 -11

- 0.225 - 0.532 - 395

0.509 - 1.532 = -460 a

0.714 b 1.119 =

0.462 a 0.081

1.774 0.530

- 1.358 - 0.463

0.099 - 0.034

0.649 a

0.039 - 0.681

1.133 b

143

27.5% 4.62

Depth measure

250 b

-53

754 = 219

- 280 -43

- 146 -34

267 a

143

21.3% 3.39 =


dependent variables are on differing scales, numerical comparisons of these coefficients either across the rows or down the columns of the table are not always meaningful. However, both the signs of the coefficients and comparisons of ratios of coefficients do have a direct interpretation. It can be seen that not all the variables in the groups had significant effects on all dependent variables, and some had no significant effect on any variable. In the Economic Resource group, occupational class had no significant effect on any variable (indicating that the effect seen in Figure 5b can be explained by the correlation of class with such variables as income and housing status). In the Social Support group, the number of other people respondents knew who were in debt had an independent effect on all dependent variables, but respondents estimates of others attitudes to their (the respondents) debt had no significant effects. In the Attitude-forming variables group, Age showed some independent effects but religious affiliation did not. The only anomaly, relative to the first order effects shown in the figures, occurs in the Economic Resources group, where both measures of the extent of debt show a negative effect of renting rather than owning a house on a mortgage.

The relative effectiveness of the predictors (indicated by the significant levels they reach) were slightly different for the different dependent variables. For credit-rating group, the variables that emerged as having the largest independent effect were the number of children in the household and the housing variables. For the existence of self-reported debt, the number of family and friends in debt and age group (with young respondents being most likely to report debt) were most important. For the extent of self-reported debt, number of family and friends in debt and (especially) attitudes were most significant. Table 4 also shows some interesting reversals. House renters are significantly more likely to be in one of the debt groups, and (non-significantly) more likely to self-report debts, but if they do report debts, the amount is significantly less than for mortgage holders. Those in the 45-54 age group are significantly more likely to be in the debt groups, but (non-significantly) less likely to self-report debt, and if they do report any, report less than the modal (35-44) age group.

As a check on the possible distortions introduced by non-returns, the factor of late return was introduced into all four multivariate analyses after obtaining the results reported in Table 4. It had no significant effect on any dependent variable, and the general pattern


Table 5 Use made of sources of help by respondents in the Serious debt group.

Source of help Percentage of the group reporting using source

Person/institution to which money is owed Friend Family Bank or building society manager Unemployment/Social security office Citizens Advice Bureau Local council Other

33% 32% 28% 26% 16% 14% 13% 3%

of regression coefficients was unchanged. The only substantial change was that, with late return taken into account, the perceived attitudes of others to the respondents debt showed a significant independent effect on the presence of self-reported debt, whereas income and housing variables did not.

Further analysis of the Serious debt group

Further analyses were carried out on the group of Serious debtors. Table 5 lists the proportion of the group who reported using each of the helping agencies we enquired about. It can be seen that most of them are used a considerable extent, and no one of them is dominant.

Most of the Serious debt group reported seeking help from at least one of the agencies listed in Table 5; only 19% did not use any of them. This small group differed from the rest of the Serious debt group in a number of ways. Differences that were found to be statistically significant are listed in Table 6. A minority (28%) of respondents in the Serious debt group reported that they did not have any debt to the water company. Their answers to the remaining questions on the questionnaire were compared with those of the rest of the Serious debt group, and a number of significant differences were found. These are also listed in Table 6. The differences on both these factors are almost all in the direction of the minority group (non seekers of help, or those not reporting debt to the water company) being more like Non-debtors or Mild debtors than the rest of the


Serious debt group. The only exception is that those not reporting debt claim that their family or friends would be less disapproving of their (the respondents) debt if they knew of it.

Discussion

Representativeness of the sample

The response rate was disappointing. However, the estimated figure for a corresponding random population sample, 21%, is not unreason- able given that the subject of the questionnaire was a potentially sensitive one. The lower figures for the two debtor groups were to be expected, given that the subject was not just potentially but actually sensitive for them, and for the Serious debtors at least, they were individuals who were facing fairly serious difficulties. It is unlikely that filling in questionnaires would be high in their priorities. The multivariate analysis indicates that, with other variables taken into account, there is no significant or substantial difference between early and late returned questionnaires, despite a marked tendency for the debt groups, especially the Mild debt group, to be late returners. This makes it less likely that non-return will have affected the pattern of results (Oppenheim 1966).

As a sample of the population as a whole, water customers will show some inevitable deviations. Private tenants, people in lodgings or living with family or friends, the young and the old, are likely to be seriously underrepresented. Furthermore, water bills are addressed to one person in a household, and given traditional gender roles this is most likely to be the husband or father. In spite of these difficulties, the respondents seem to constitute a very reasonably representative sample. The gender distribution is surprisingly near equality; the overall age profile is close to the population form except at the extremes; and the income and social status profiles are also close to population values. Except for the near absence of private tenants, the same could be said of the housing profile.

The credit groups manipulation

Two lines of evidence show that the sampling procedure was successful in identifying groups who were not in debt, mildly in debt,


and seriously in debt. First, when asked directly about debt to the water company, almost none of the Non-debtor group, a third of the Mild debt group, and a substantial majority of the Serious debt groups, acknowledged some debt. Bearing in mind the lag between selection of addresses and return of questionnaires, the anomalies are not a major cause for concern, though they may indicate some tendency to self presentation. Second, on every measure that could reflect financial strain, the three groups differed in the expected way. There was, indeed, nothing at all special about water charge debt. Respondents whom we knew to owe money to the water company also

Table 6 Significant differences within the Serious debt group according as to whether or not they sought any form of help, and whether or not they reported that they had any debt to the water company. Note that if there is no entry in the X2 column for one of the two partitions group, then there was no significant difference for that grouping for the variable concerned.

Variable Responses of non-help X2 (df) users and/or non- acknowledgers of debt:

For help use For self- report of water debt

Subjective financial Less difficult 11.98 b (3) 14.43 b position

Overdue payments on mortgage or rent

Debt to water company Debt to electricity

board Debt to British Gas Debt to British

Telecom Action on last credit

card debt Number of family

friends in debt Reactions of

friends/family to respondents debt

Help sought from local council

Marital status

Housing status

Income

a p < 0.05; b p < 0.01.

Less

Less Less

Less Less

Repaid sooner

Fewer

Less disapproving

Less

Fewer singles, divorced or separated

More owners, fewer tenants

Higher

9.19 a (3) 8.97 a (3)

9.46 a (3) 10.68 a (3)

10.17 a (3) 6.17 a (2)

11.68 = (3)

10.44 a (3)

8.19 = (3)

3.92 a (1)

10.63 a (4)

10.52 a (4)

9.91 a (4) 12.41 a (4)


acknowledged debts to other creditors, and those whose water debt was more serious acknowledged more additional debts. Public utility companies differ from some of the other creditors we asked about, in that they do not set out to lend people money, and people do not ask their permission before borrowing from them (i.e. paying their bills late or not at all). Furthermore they have a well-structured system of reminders, court proceedings, and ultimately disconnection, the first stages of which, at least, are well known to their customers. However, none of these differences seemed to produce behaviour that was very different from that shown towards other creditors.

Debt and financial strain

The overwhelming impression from the results is that debt is primarily a problem of poverty, and in particular of family poverty. Compared with the Non-debtors, the Serious debt group have lower household income, are of lower socioeconomic class, are less likely to own their homes (and much less likely to own them free of a mortgage), and have more children. Both these results agree with data obtained by Berthoud and Kempson (1990) concerning problem debts. It is particularly striking that only 1% of the Non-debtor group had three or more children in their households. With the exception of the effects of class, all these results are confirmed as independent of one another by the multivariate analyses. There were also trends, though they fall short of significance, for debtors to be less likely to be living in two-adult households built round stable relationships. On first-order analysis, the debtor groups emerge as younger (again a finding agree- ing with Berthoud and Kempsons, 1990, analysis), so presumably their children are younger; it should be noted, however, that the multivariate analysis of credit-rating group suggests a subsidiary peak of indebtedness in the 45-54 age group. In all these respects, the Mild debtors are intermediate between the Non-debtors and the Serious debtors, which adds credibility to the results. The results here are consistent with the classic cross-sectional econometric results on the saving ratio (e.g. Bean 19461, which show that as income increases, so does the proportion of it that is saved; since running up debt is simply a form of negative saving, it is in no way surprising that it is more often done by those with low incomes.

There is considerable evidence, then, that debt is an unsought consequence of a households financial difficulties. Those difficulties


might arise simply from an impossible economic environment, from individual financial incompetence, or (most likely) from a combination - less competence is needed to keep ones head above water on an income of over &20,000 a year than on one of under &5000. Perhaps persistent debtors have poorly organized psychological accounts (Ranyard 1988). This possibility does not exclude strategic use of Hump debt. A mortgage is, in fact, the classic hump debt device, allowing one to consume housing services which ones current income is not sufficient to buy; postponing payments to credit card companies, friends and family, and public utilities is simply a less legitimized extension, but one which is available to people who cannot get a footing on the mortgage system. It is interesting in this context that there is a consistent consumer view about which household bills should be paid off first, given limited funds (Figure 4).

The general trends, therefore, give no evidence that consumers are fecklessly or carelessly running up debt. Compared with the results obtained by Lunt and Livingstone (1991) on the explanations people give of others debts, the data suggest that the causes of debts are more external and economic than most people think: greed and lack of self-control are not much in evidence in our data, whereas they are central to the explanatory networks people produce when they are asked why they think people run into debt. It is true that for each of the trends outlined above, there were a minority even of the serious debtors who did not accord with the general rule - who were of higher social class, owned their own homes, had high incomes, had no children, and so forth. However, the breakdown of the Serious debt groups suggests that these were the people who had in fact recently repaid their water debt. Possibly they included some feckless or even strategic debtors, but if so it looks as though appropriate legal steps were sufficient to make them repay their debts.

Secondly, however, we must bear in mind the low return rate, especially in the debtor groups. If there is a group of feckless debtors, they are probably the least likely people to fill in and return a questionnaire that drops on them out of the blue. Methods other than random postal surveys are going to be needed to reach this group if it exists.

Several authors (e.g. Berthoud and Kempson 1990; Cameron and Golby in press) have found that the amount of indebtedness increased with income, whereas we found that debtors were more likely to be


young and to have low incomes. However, Cameron and Golby were looking at crisis debtors, and Berthoud and Kempson at people who were using credit rather than running up debts. Those with high income can safely use larger credit facilities, and if things go wrong are likely to be left with larger unmanageable debts. But our data show that, as one would expect, everyday debt is nonetheless associ- ated with low income.

Debt attitudes and a debtor culture?

But if economic factors play an important part in debt, social and psychological factors are also relevant. Age effects were at least partly independent of both economic and attitude variables, and in so far as that is true, they are presumably also mediated by psychological processes. The religious backgrounds of the groups were somewhat different, and it is hard to avoid seeing the remnants of the Victorian Non-conformist conscience in the higher numbers of this group among the Non-debtors. The same could be said of the agnostic/atheist group, also likely to represent a thought-out rather than a casually acquired position. It should be noted, however, that none of the religious affiliation effects emerged as independently significant in the multivariate analysis (though the same trends were evident), so these differences may just reflect the different characteristic affiliations of those who are, for other reasons, more and less likely to be in debt.

There was clearly quite a lot of social support for debt among the debtor groups. They were much more likely to know others who were in debt, and less likely to think that others would disapprove of their debts; 33% of Serious debtors thought that their friends would think it normal to owe at least flO0 to a public utility company. While this is a striking result, it is not a surprising one. The general trend of the results shows that debt is primarily a consequence of poverty. The social worlds of those who have little money are likely to contain many other people who are experiencing the same difficulties and therefore both understand and sympathise with them. In this relatively brief questionnaire, we could make no attempt to determine whether the friends and relations we referred to were reference groups for the respondents in the technical sense, but in the absence of indications to the contrary it is reasonable to suppose that they were.


Perhaps it is as a result of these social processes that the debtor groups have somewhat different attitudes towards debt, so far as we were able to measure them. Our attitude scale was only exploratory, and as such deliberately involved a heterogeneous set of items, de- rived from a prioti considerations rather than systematic pre-testing and item analysis. Nevertheless, it produced a satisfactory level of reliability and no evidence of multifactorial structure, so it is reasonable to interpret its results. The group differences in attitudes were not large, and all answers tended towards disapproval of debt. The result is in agreement with data obtained by Berthoud and Kempson (1990), who found a generally cautious attitude even to credit use. Both results may reflect the fact that no-one really wants to be in debt, or might simply be social desirability effects - perhaps the right answer was too obvious in some of the questions. In both studies, too, there is the almost inevitable problem of attitudes research: the attitudes tested are general (e.g. approval of debt as a whole), while the supposedly correlated behaviour is more specific (e.g. being slow to pay the water bill). The small size of the attitudes effect is clearly not due to correlation with other regressors (multicollinearity), however, because it emerges in the first-order analysis of group differences; nor is it any larger within credit-rating groups than between them.

Although the effect is fairly small, it is still true that the debtor groups are less disapproving of debt, and this is confirmed as an independent effect in the multiple regression. As always with an attitude measure, however, we cannot be sure whether attitudes are causing behaviour or a consequence of it. Earl (1991) has outlined how a process of dissonance reduction (cf. Festinger 1957) might bring attitudes into line with behaviour once debt has been irrevocably incurred. Once again, a different methodology will be needed to explore this area further. An obvious move would be to compare scores on an improved debt attitude scale with one of the Protestant Work Ethic scales (cf. Furnham 19901, with which it should be expected to have direct links. Debt avoidance could reasonably be seen as a variety of delay of gratification, which has been linked to the Protestant Ethic by social scientists from Weber (1904/1976) to Mc- Clelland (1961).

In the context of attitudes to debt, it is worth noting the relative youth of the debtor groups. There are two ways of looking at this. One


is to appeal to a concept of hump debt, analogous to the idea of hump saving (Harrod 1948: chapter 2). Young people are likely to have the financial responsibility for young children, have generally not reached peak earning capacity, and face higher current rents and mortgage payments than those who established themselves economically two or three inflationary decades ago. On this view, debt is something that many of this group will grow out of as middle age brings them at least a little more financial security. There is some support for this view in the fact that the age effects are less clear in the multiple regressions. The alternative view is that among this disadvantaged generation there may be growing up a greater acceptance of debt than earlier generations have shown. Adverse economic circumstances can force individuals to run up some degree of debt, and it does seem likely that attitudes to debt will become more permissive as a result. If at the same time, traditional social taboos against debt are being eroded by the wider availability of credit, those attitudes might persist when individuals economic circumstances sub- sequently improve. The result could be a self-sustaining culture of indebtedness. The present data give more support to the hump debt view than to the idea of a debt culture, but do not rule the latter out. In particular, on all measures the very oldest respondents (the 65-74 and 75 and over groups) show marked avoidance of debt, and this may well reflect an abhorrence of debt that was once marked throughout British society but now no longer is.

References

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Cameron, S. and D. Golby, in press. An economic analysis of personal debt. Bulletin of Economic Research.

Corkish, J., in preparation. An overview of consumer credit and an analysis of factors causing unmanageable debt in 25-34 year old consumers. Unpublished Ph.D. dissertation, University of Wales.

Earl, P.E., 1991. The complementarity of economic applications of cognitive dissonance theory and personal construct psychology. In S.E.G. Lea, P. Webley and B.M. Young (Eds.), New Directions in Economic Psychology. Cheltenham: Elgar.


Festinger, L., 1957. A Theory of Cognitive Dissonance. Evanston, IL: Row, Peterson. Ford, J., 1988. The Indebted Society. London: Routledge. Furnham, A., 1990. The Protestant Work Ethic: The Psychology of Work-Related Attitudes.

London: Routledge. Harrod, R.F., 1948. Towards a Dynamic Economics. London: Macmillan. Katona, G., 1975. Psychological Economics. New York: Elsevier. Lea, S.E.G., R.M. Tarpy and P. Webley, 1987. The Individual in the Economy. Cambridge:

Cambridge University Press. Lehnert, K.F., 1977. Das psychologische Konkursprofil. Psychologie und Praxis 21(2), 86-91. Leigh-Pemberton, R., 1989. Personal credit problems. Bank of England Quarterly Bulletin 29,

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approach. British Journal of Social Psychology 30, 309-323. McClelland, D.C., 1961. The Achieving Society. Princeton, NJ: Van Nostrand. Oppenheim, A.N., 1966. Questionnaire Design and Attitude Research. London: Heinemann. Ranyard, R., 1988. Personal credit-user decisions: A cognitive-psychological perspective. Paper

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The Economic Psychology of Consumer Debt

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