Good credit, bad credit: The differential role of the sources of debt in life satisfaction

Abstract

This study evaluated the short-term links between different forms of household debt—credit card debt, student debt, debt from relatives, mortgage debt, car debt, and debt arrears—and life satisfaction. To this end, a longitudinal dataset for the US population from the Panel Study of Income Dynamics (PSID) was used and the propensity score difference-in-differences approach was applied. Credit card debt and student loans negatively impacted life satisfaction in the short term (up to 2 years). Mortgages and external financing for a car, however, were found to increase life satisfaction. The effects associated with the initial uptake and final repayment of a loan turned out to not be symmetrical—the end of any type of loan contract was not related to life satisfaction. In the case of involuntary debt (i.e., mortgage arrears), a significant negative impact on life satisfaction was noted when problems emerged, while a positive effect was found when the debts were paid off.