The Misery Trap
Accelerating credit debt is eroding mental health
IT’S NOT ABOUT WHAT YOU CAN AFFORD THESE DAYS. IT’S ABOUT HOW MUCH YOU CAN GET ON CREDIT. THIS YEAR’S RECORD CREDIT DEBT FIGURES SHOW NEW ZEALANDERS ARE HAPPIER TO PAY ON TICK THAN EVER BEFORE. BUT THE SUGAR COATING ON EASILY WON LOANS, CREDIT AND STORE CARDS SOON WEARS OFF WHEN THE MISERY OF OVER-INDEBTEDNESS SETS IN.
SALLY WEBSTER INVESTIGATES.
In 2004 the Strategic Social Policy Group for the Ministry of Social Development produced a paper, ‘When debt becomes a problem: A Literature Study’.
Though penned by Oliver Valins over ten years ago the words have more relevance than ever today:
‘Since at least the early 1970s there has been a credit revolution. New technology facilitating the widespread use of credit cards, and the financial deregulation policies of many countries in the 1980s and 1990s, have provided consumers with far greater ease and access to credit…From a social and economic perspective this raises questions about the impacts…on individuals and families, particularly for those with lower incomes.’
The Reserve Bank of New Zealand Credit Card Survey billing figures from major banks, American Express, Diners Club, GE Money and the Warehouse show that New Zealanders spent NZ$2553 million using credit cards here in January 2015.
But many people still hadn’t cleared their 2014 portion of the $3289m spent in December, or the $2642m spent weeks before in November. Therein lies the interest.
RBNZ credit card balance summaries show this February’s end of month balance sat at $6433m –a small $300m jump from 2014’s $6151m, but a 35% leap from the $4,134m owed in February ten years ago.
Shamubeel Eaqub, Principal Economist at the New Zealand Institute of Economic Research says that credit debt has, in a way, become a gentrified form of expensive consumer debt. “It is much more convenient to use a credit card than have to go somewhere to apply for a high interest loan.”
Eaqub explains that the deregulation of banks that started in the late 1970’s was in essence, a shift in approach to risk. Lending got more and more easy – prior to that, banks’ lending was restricted to their capital. Now they offer customers “many, many times more” than what they actually have.
Customers accept the offer and happily spend many, many more times than what they have too: “We are now able to do a lot more with a lot less of our own money” says Eaqub.
But despite having the online comfort associated with a credit card application, approval and spending ease, many New Zealanders have a lot of other high interest balls in the air too. Interest.co.nz shows that consumer credit (including credit card debt, instalment credit, hire purchase, personal loans, car loans and store credit, but not mortgages) came to $15,041m at the end of February this year. Last year’s total was $14,189m and in 2013 we accumulated $13,599m of consumer credit. We’re looking at a rise of an average $750m a year for the last two years.
It’s a struggle to comprehend proportion when you’re dealing with over 10 billion dollars, but it’s when you look back at February 2005 that our credit consumption growth hits home. Ten years ago consumer credit sat at $12,541 and for about 8 years you could chart the average growth at less than $150m a year. Recently we’ve stretched to $750m a year.
This approximates a five-fold swell over the last 2 year period; in other words, we’ve swiped or typed through a sum that prior to 2013 took us 8 years to clock up. This isn’t growth, this is giddying acceleration.
“We have to realise that debt does not have the stigma that it used to have. We are a product of our environment – if it’s socially acceptable we will do it” says Mr Eaqub.
“A lot of people of our grandparents’ age loathed debt. This was largely because of the Great Depression, when a lot of people whose debts far outweighed their assets were wiped out.”
While a decent proportion of 2,375,000 working Kiwis will manage this year’s credit debt adequately, between 10% and 20% won’t; a government Living Standards Survey in 2000 estimated at least 15% of the population struggled to live on their income.
According to a report by Child Poverty Action Group in 2014, ‘New Zealand’s debt society and child poverty’, the debt trap starts with an expensive credit to income ratio: a consumer’s credit card interest might be 12% to 25% like anyone else’s. But a struggle to make repayments might result in defaults, quickly followed by a bad credit rating and a dead end for bank credit.
‘Once access to mainstream lenders is lost…people on low incomes may resort to loan sharks [charging] an annual interest rate of 25% to 500% or more plus administration fees. They may be trapped forever by the debt.’
New Zealand has a raft of agencies who can help, many of whom belong to the New Zealand Federation of Family Budgeting Services Inc (NZFFBS). Their staff and volunteers see a clear correlation between the freeing up of credit, its increasing usage, and the depletion of family wellbeing.
Mike Curry, NZFFBS Service Support Manager, says the organisation is seeing client numbers swelling along with the country’s credit debt.
“We cannot prove this statistically yet, but I can tell you anecdotally that for years we were steady at about 30,000 clients across the country. We’re now levelling off at about 50,000. Many advisers will also tell you the complexity of client cases is ever-increasing; where 10 years ago a client had five debts, they now seem to have twenty.”
NZFFBS member and stalwart of Dunedin’s budgeting community, Mike Williams, is the Senior Adviser at Corpac Trust. He agrees with Curry, comparing the kind of debt he sees these days with his first days on the job.
“When I started here 10 years ago most people were coming in wanting a budget done because maybe they had a debt with Baycorp and wanted to pay it off with enough left [to live on] and buy a packet of smokes too. Now they’re coming in with consumer debt, credit card debt, Q card debt, GE Money debt – it’s all this access to credit that they’re not managing.”
Curry says at end of June 2014, of their 45,944 nationally distributed clients, most owed money to at least six major creditors.
“If we take out banks, clients owed Spark NZ $5.7m, Q card $4.3m, DTR $2.6m and Instant Finance $4.3m.”
The biggest debt lies with GE Finance, to whom 2, 638 clients owed a whopping $30m.
Curry says all this relates to another concerning factor: budget coordinators are saying the gap between income and expenditure is closing. In fact the space between income and outgoings is so tight these days that some families have a negative end of week balance and resort to credit to survive.
“Our figures won’t show you the growing difference between income and expenses, as we don’t formally report on this…yet” says Mr Curry.
A Statistics New Zealand Household Economic Survey in 2014 does highlight this issue though. Between June 2012 and June 2014, average annual household income rose 9.1% and wages and salaries rose 7.7%. But housing costs rose 11.1% and property rates rose 12.5%. Aucklanders’ rates shot up over 10% in many cases and this year property rents are doing the same.
Budgeters say 2015 has proved particularly worrying because more middle and low-income families are resorting to credit to kick off the most expensive school year yet.
“School costs have skyrocketed” says Julia Hart, Coordinator & Manager at North Harbour Budgeting Services (NHBS). She observes that people’s expectations of standards of living are higher these days too, and while this contributes to credit debt, worse still are society’s expectations forced upon them.
“Children now required to have tablets for school is an example of this expectation and many families can’t afford it without going into debt.”
When over-indebtedness is set against an economic climate of rising rents and costs of living, mental health begins to suffer.
“Words I would say stand out for feelings around debt are depression, anxiety, shame, guilt, fear, and anger. Depression and anger usually go together” says Geoff Curson, Coordinator at Newtown Budgeting and Advocacy Service in Wellington. Mental health plummets as people start losing hope, feeling that things are out of their control.
As an ex-manager of mental health services who switched to budgeting 3 years ago he can see a strong link between mental ill health and debt across a wide spectrum of clients.
“These are people from a range of cultures – income earners, beneficiaries or people with and without addictions who have fallen victim to lenders.”
However at NHBS Ms Hart says people experiencing a state of distress is common whether mental health is in question or not and it is important not to label or assume: “new clients may become upset and shocked when we help them to confront the entirety of the debt” .
Yet her advisors report that up to 40% of clients would appear to be suffering with possible depression or anxiety. Staff are not qualified to make any judgment calls on whether they need help but refer on with the client’s consent or suggest the client self-refers.
It is obvious there is a mental health issue if a client threatens suicide however. Julia says in those instances “you don’t mess around.” Other staff may be called in to assist and occasionally the mental health crisis team at the hospital have to be called.
Vaiola Harris of Vaiola PI Budgeting Service in Mangere, Auckland, and her team have saved 440 houses from mortagee sales and stopped 491 evictions since they opened in 1997. She sees people in high states of anxiety and distress and says debt affects the physical health severely too.
“People come in here as a last resort: some of them pass out, some of them we’ve had to send straight to hospital. Some come in and state that they are going to commit suicide. If that happens we get them sat down and calm them, make them a cup of coffee before we start sorting things out.”
Worry about a growing number of seriously distressed clients led KiwiDebt Director Matthew Nutter to arrange psychological help for clients. He says too many people were ringing up saying ‘I can’t handle things, I’m getting calls all day…I may as well give up now.’
“I looked around for services to hand people on to and that usually stopped when calls to psychologists were simply not returned.”
But his persistence paid off with Auckland based therapy and rehab group Lifespan. This will be the 2nd year therapists have taken referrals from KiwiDebt. Their fees are charged to the client as part of the overall debt repayment plan.
“We say to creditors, ‘help us to help your client. In doing this we can get 100% of what‘s outstanding back.’ We’re trying to avoid bankruptcy you see.”
This model is not for every client, but Nutter recounts one successful case of a woman involved in a Nigerian scam in 2014. After her car was repossessed and she was ‘bombarded by calls and threats of court’, she said she would kill herself. So KiwiDebt sent her to Lifespan. It transpired she had even been too ashamed to tell her partner – a situation that adds extra weight to the debtor’s mental burden.
Organisations say that labelling people as types who will get into debt has never been helpful but now because of the grip of credit and a shortage of money for even dual-income families, it is downright inaccurate. It is more appropriate to adopt a ‘there but for the Grace of God go I’ approach.
Corpac Trust’s Williams supports this, saying his client demographic is changing to include more and more ordinary people. The Trust was founded in 1995 as the doors of the country’s remaining mental institutions were banged shut. Back then nearly all the clients already had a diagnosed mental illness and needed help with managing money as they tackled life in the community. However he observes that now, a third of previously well clients are probably suffering poor mental health directly attributable to debt.
Even though some people will always be predisposed to accrue debt, Williams suggests this newer debt-misery is a symptom of a vast social problem.
“The pressure is too much. Money gets its tentacles into so many aspects of our lives, and when you start talking to the client you see the problem is much wider than a particular debt.”
Newton’s Curson says all it takes is a significant change in circumstances, borrowing money from the wrong people, missing a payment hurdle and the debt snowballs.
“It is far too easy to generalise what kinds of people get into debt. Yes, some people make financial decisions that seem silly and they take on debt they know they will not be able to pay back, when compared to others who tend not to suffer debt problems.
“However many of these are single parent or single income families who might get into strife because they care. Children, teenagers can be very demanding and not understand that they can’t have what their friends have. Parents can feel great pressure to borrow.”
Kiwidebt’s Mr Nutter says New Zealand is one of the few Western Countries in the world where, when people stumble, we don’t have the legislation to help steady them.
“Then when they are down, this punitive culture suggests to them they were stupid for falling down in the first place. But many ordinary people are stumbling and falling down now.”
New Zealand’s Mental Health Foundation was not able to offer any information or links for people suffering the misery of debt, but overseas it is a different story.
Scotland and Ireland have a dedicated National Debtline website; England offers mind.org.uk, a mental health organization that dedicates a section of their site to debt and mental health.
British newspaper, The Guardian, wrote about Stepchange in 2013, a charity who received 5,000 calls from ‘people suffering from financial problems coupled with either anxiety or depression’ in 2012. Their stance is that, based on polls, debt severely affects mental health. Of those who expressed symptoms, almost 60% were identified as suffering with severe anxiety or depression, 27% had moderate anxiety or depression and 13% mild anxiety or depression.
KiwiDebt’s Nutter is pleased that the kinds of loan collection practices that make such symptoms much worse will be fenced by a new responsible lending code by June 2015, in line with other changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
But, he asks, will the responsible lending practices go far enough to help those that have already been pushed too far?
“We don’t believe that the rules will go far enough to protect those people that are already in default or struggling. What it might mean is that accounts will be set off to collectors earlier rather than later, adding further pressure.”
Lifespan psychologist and Co-Director Dr Deborah Perrott says that when KiwiDebt send them desperate clients they do a full assessment, initially viewing the debt as the presenting problem and its impact on the person’s life, including relationship & family.
Perrott explains that when a debtor has not disclosed the debt to a partner it increases stress, but it may be perceived as “safer” not to disclose the debt. Sometimes one individual or partner is quietly carrying debt for the whole family, paying for food or rent or children’s needs in an extended family situation.
“Adapting to the issue of debt in your life is stressful and adjustment is required at many levels”.
Debtors have to think about debt at a ‘doing level’ such as what to do now you have a new budget; at a thinking level now that finances are different; at an individual level to ensure healthy self-management; at a relationship level to keep the relationship on track; and at a family level to make sure the kids get everything they need.
Then there are perceptions to tackle. Typically, a male in a previously executive role will ask themselves: ‘What is my identity now that my job is gone? What will I do to support my family? How will I be socially be perceived?’
“Psychological impact on financially indebted individuals may culminate in depression. Given the development of a negative self-perception, clients often need therapeutic help to redefine themselves and question if their success in life is purely based on assets” say Perrott.
”They may view themselves as a failure and be convinced that others such as their loved ones define them as such. But ultimately, they are guided to see themselves in a broader context and not how depressive thoughts would have them believe.”
Curson advises people committed to escaping debt to be prepared for it to take time.
“It is usually a long process and this can be depressing in itself. It is a time where a lot of change is needed. In this mix too can be humiliation and, for some, the prospect of insolvency. Because of this it is important to have support systems with family and friends – people you can talk to and trust.
“This is important because when people feel shame they will also tend to self-isolate. People appreciate the understanding of budget advisers and their willingness to help the person work through the problems with them.
“People tackling debt are not alone; debt is a large problem in our society and it has become all too easy to borrow money and end up in a dangerous place.”
The best advice, say budgeters, is to tackle the debt as soon as it appears. Too often people ignore it – Ms Harris says some of her clients ended up at mortgagee stage because they had been too afraid to open letters that arrived weeks before lenders foreclosed. The sooner debtors ask for help the better.
“Many don’t get to the budgeting office until debts are out of control simply because they don’t realise the services available to them” adds Ms Hart. “NHBS runs budgeting seminars, community education [classes] in good money management practice and free one to one appointments.”
On a national scale, NZFFBS have understandings with a large number of creditors that help clients deal with creditors and the overall debt.
“But the impetus is always to empower the client” says Ms Hart.