Over Indebtedness and Depression: Sad Debt or Sad Debtors?

In the last decades, consumer debt experienced a marked increase in the United States, Latin America and other emerging countries, spurring a debate about the real costs and benefits of household credit. This paper explores the psychological costs of over indebtedness. Using a unique dataset with detailed health and balance sheet information of a large sample of Chilean households we construct depression measures based on a questionnaire used in standardized medical diagnosis. We find causal evidence that over indebtedness increases depression and that the effect is large, comparable to half the effect of the loss of a family member. Most of the impact seems to be associated with non- mortgage debt -primarily consumer credit supplied by large retail chains- or late mortgage payments. We explore some of the behavioral and cognitive channels that make over indebtedness psychologically harmful. The probability of over indebtedness is found to be higher for individuals that exhibit self-regulation problems (gambling, smoking, drinking), leading to higher depression. This is a measure of the cost of debt explained by impulsivity in terms of an objective psychological well-being indicator. Individuals with higher numeracy skills are also associated with higher over indebtedness but -ceteris paribus- their overall depression measures are lower. Our findings suggest that self-control and cognitive abilities play a role in explaining sad debt.