My Credit, Myself: Young Adults Using Credit to Boost Self-Esteem

Trying to make it in the real world -- and build a solid financial life when you're just starting out -- can often feel like a losing battle. This is especially true these days with high food and gas prices, sharply rising college tuition and health care costs and a steep unemployment rate. However, research shows that for some 20-somethings, it may just take a quick swipe of a credit card to feel like they've got everything under control.

A study from Ohio State, published in May 2011 in the Journal of Social Science Research, found that when young adults from poor and middle-class backgrounds used student loans and credit cards to finance their uncertain lifestyles, they felt a temporary but powerful boost in self-esteem and in feelings of mastery over their environment.

"Young debtors experience debt as empowering," wrote the sociologists who researched and wrote the study -- lead author Rachel E. Dwyer and Randy Hodson of Ohio State, and Laura McCloud of Pacific Lutheran University. When young people in their early to mid-20s take advantage of their access to credit, they feel that they have "prepared themselves to meet the future -- at least until the full requirements of repayment ensue."

The study's conclusions were derived in part from interviews with 3,079 young adults ages 18-34 that were conducted on behalf of the U.S. Bureau of Labor Statistics for a biannual survey on American youth. The samples for the study were collected before 2005 -- well before the impact of the recession may have caused young people to rethink the impact of their debt. However, the researchers say that the findings are a cautionary tale for young adults who use debt to purchase a lifestyle they couldn't otherwise afford.

The road to debt

When older adults think about paying down large amounts of debt, they often imagine feeling weak, powerless and out of control. However, some 20-somethings say that it's liberating to be able to use debt to achieve a lifestyle they always wanted -- and the interest that they pay later is worth the extra cost.

Take, for example, Meredith Blount, a 27-year-old lawyer in New York City. Blount grew up poor in a small town in Central Florida and knew from an early age that the only way to afford the education and lifestyle that she dreamed of was to purchase it with credit. "I had to come to terms with the fact that I had to take on a lot of debt to support myself in the way I want to and give back the way I want to," says Blount.

Blount took on $410,000 in student loans in order to finance an undergraduate degree, a master's degree in finance and a law degree from a prestigious university in Tennessee. "You have to get that education in order to be accepted into the real world," says Blount. "At least in the real world I wanted to be in."

Blount says that her access to credit also allowed her to accumulate invaluable experiences that helped broaden her perspective. For example, after college, Blount racked up about $5,600 in credit card charges that she mostly used to travel to India, Costa Rica, Spain and Peru. The experiences were worth the charges to her credit card, she says, and her income as a lawyer allows her to keep up with the monthly payments.

Blount says that she doesn't regret most of her debt. However, experts worry that this kind of borrow-now, pay-later attitude can lead to frightening consequences for those who find themselves saddled with ballooning interest payments. This is especially true for those who never break the habit of using credit to fund their preferred lifestyle.

When credit becomes addictive

The researchers at Ohio State believe that young adults tend to use debt not just to exercise control over their circumstances, but also to increase their status in the eyes of others and to boost their self-worth.

For example, the researchers say, a young adult who is just starting out may use a credit card to purchase appropriate clothes for a job interview or to purchase entry into a fraternity or sorority that provides valuable social connections that can be used to get ahead. It isn't until they reach their later 20s that they begin to realize the full impact of that debt.

Jason Eichacker, 31, of San Jose, Calif., for example, used debt throughout his 20s to help finance expenses that helped move him closer to his goals. "When I needed professional looking clothes or textbooks, I just put it on my card," says Eichacker. To justify it, he told himself, "'You know what, I'm going to make good money. I'll be able to pay it off pretty quick.'"

Unfortunately, Eichacker's habit of using credit to finance his aspirational lifestyle later spiraled out of control when he opened his own business and used business and personal credit cards to purchase what he needed. "When the business foundered, I had to declare bankruptcy," says Eichacker. He now receives collection calls almost daily and his personal relationships have suffered as a result of his wrecked credit history.

Eichacker admits that self-esteem issues and an early concern with status and control over reaching his goals were at the root of his behavior. "It gets down to the picture in my mind of how I was supposed to look like," says Eichacker. "I was more concerned with that than I was about how my credit would be down the line."

Power and status matter, say researchers

Young adults' desire to look good in the eyes of others and to feel more powerful than they are could also be a key reason why they are so willing to take on heavy debt loads, say experts.

"Desire to be as high in the hierarchy as possible creates a powerful psychological state," says Adam Galinsky, a professor at the Kellogg School of Management at Northwestern University. And when we're feeling like we're low on the status totem pole, we find ways to compensate, including making status-based purchases that make us feel better and more in control.

Derek Rucker, also of the Kellogg School of Management, agrees. Rucker and Galinsky co-wrote a paper in 2008 that found that when consumers are feeling low on power, they compensate by spending more on high-status items.

"Buying things is a way to alleviate [a feeling of powerlessness]" says Rucker. "It might be only temporary, and so I continue to buy and that's how I accrue debt. When consumers feel powerless, they spend in ways that help them accumulate power or at least the psychological feeling of power."

Those findings correlate with the Ohio State study, which found that young adults who felt the most empowered by their ability to take on debt in order to buy experiences or things were from a low-income or middle-class background. Those from an upper income bracket, in turn, appeared to get no psychological benefit from their debt.

"The wealthiest young people have the most resources and options available to them, so debt is not an issue for them," Ohio State's Dwyer explains in a press release. "The groups that most need the debt -- the middle and lower classes -- get the most benefits to their self-concept, but may also face the greatest difficulties in paying off what they owe."

Mixed messages on credit and debt

Many young people have also learned that they need credit -- and a solid credit history -- in order to live a normal, middle-class lifestyle. The problem is they sometimes conflate their ability to access credit and build a good credit score with their value as a person, say experts. And this, too, can lead to a slippery slope toward excess debt.

Michelle Barnhart of Oregon State University co-wrote a study published online in April that found a startling correlation between bank loans and self-esteem. Researchers interviewed 27 white, middle-class consumers in 2006, well before the recession, and found that many of the young people they spoke with measured their self-worth by the types of loans that they were approved for.

"A couple said things like, 'Well, you know, I went to get a car and the car dealer ran my credit score and my income, and they said that I was good enough for the car I wanted. By implication, they were saying they deemed me good enough to get that car,'" recounts Barnhart. "That really intrigued us. It makes you feel really good about yourself when your creditors are willing to loan you this money."

At the same time, says Barnhart, researchers found that some of the young adults in their study viewed their credit scores as an essential yardstick to measure how well they were living up to expectations. "The credit score indicates something to them about their value as a person," says Barnhart. "The ones who had bad credit issues recounted those times as feeling really bad about themselves." Then, when they managed to rebuild their scores, they felt good about themselves again. "Rebuilding your credit score is almost rebuilding you," notes Barnhart.

But if you find yourself already deep in debt, Sullivan adds, "stop digging. Whenever you find that your debt load is too high, whenever you look at it and see what it's costing you and it becomes alarming because you know it's more than you can handle, stop digging. Stop borrowing."

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