The psychological benefits of paying off debt

Americans across the nation have undoubtedly felt the impact of inflation on their wallets over the last few months. Bankrate’s Credit Card Debt Survey found that 50 percent of cardholders are carrying a balance month-to-month — the highest percentage since 2020. Many others have student or personal loan debt.

For those struggling with debt, debt relief options can help make monthly payments more manageable and quicken the road to financial stability. This, in turn, can lead to a healthier state of mind, as money is still one of the top stressors for the American population.

The psychology of being debt free

According to experts, paying off debt comes with the following perks.

Less stress, improved health

It’s no surprise that owing a large amount of money causes psychological strain, but did you know that it’s ranked as one of the most stress-inducing life events?

Bankrate’s Financial Wellness Survey found that among those who say money has a negative impact on their mental health, 47 percent say being in debt negatively impacts their mental health.

According to AIMS Public Health, people with debt are three times more likely to struggle with worry-induced depression, anxiety and stress.

Emotional relief

Eliminating debt is more than just a numbers game — it’s an act of breaking free from difficult past experiences. That being said, when you become free from that debt from your life, you’ll likely experience emotional liberation.

Dr. Gail Saltz, clinical associate professor of psychiatry at the New York Presbyterian Hospital Weill-Cornell School of Medicine, affirms the heavy toll that financial stress takes on mental and physical health.

“Ongoing financial stress translates to chronic stress which can lead to depression, anxiety, high blood pressure, back pain, stomach ulcers, etc.,” Saltz says. “The point is high stress causes cortisol release, which impacts the health of all organs including the brain.”

According to Saltz, paying off your debt removes the fear and stress associated with it. “While money does not make one exponentially happier after a baseline amount of reasonable well living, below that and certainly debt does detract from happiness,” she says, adding that the closer one gets to the baseline reasonable living number, the more likely they are to feel the positive impact of paying off debt.

Freedom to pursue other life goals

When you’re in debt, it can feel like your life is on hold. On top of the stress, the impact that missed debt payments — and even debt in general — have on your credit score makes it harder to get approved for other important financial milestones, like buying a car or getting a mortgage.

Chris Dlugozima, learning experience designer at GreenPath Financial Wellness in New York, explained that after his clients paid off their debt, they experienced much more freedom.

“I had a client [who] came in to see me; he was devastated,” Dlugozima said in a previous interview with Bankrate. “His fiancee had found out about his financial situation. He wasn’t sure if the marriage was going to go through.”

Dlugozima said that he worked with the client to create a unique payment program that helped him steadily knock out debt. Several years later, the client reported to be happily married.

“It’s not just about the money, but about how the money can get in the way of life’s other goals,” Dlugozima added.

Increased self-confidence

Debt tends to carry a uniformly negative stigma and can weaken self-esteem at its root.

“Real financial stress — it eats a person’s soul in a way that’s very different than other parts of our lives,” says Ryan Howell, professor of psychology at San Francisco State University and co-founder of Beyond the Purchase.

In fact, the shame associated with debt can drive people to mask their hardship in unhealthy ways. “You can still have the nice house, the nice things,” said Dlugozima. “But really, behind it, the financial walls are crumbling.”

Once debt is paid off, your self-confidence can make a fast turnaround. Some individuals even share their debt stories out of a renewed sense of confidence, according to Dlugozima. “You become more open about it because you’ve gotten through the other side,” said Dlugozima. “It’s empowering.”

The strength to avoid slipping back into debt

In some cases, debt payoff can strengthen your resolve to stay financially solvent. Yet the likelihood of this occurring depends on the manner in which you paid your debt. For example, if you worked hard to steadily pay down your debt, you likely have practiced discipline to keep your finances in check going forward.

To keep yourself from returning to the bad habits that got you into debt, Christian Patterson, Wealth advisor at QuadCap Wealth Management, LLC, suggests keeping a tight grip on your budget, regardless of your annual income.

“It is important to keep track of where your money is going once your monthly income increases. Lifestyle and debt cycles can be detrimental to having a healthy financial future,” Patterson says.

Improved relationships

According to Bankrate’s 2024 Financial Infidelity Survey, 42 percent of Americans have kept a money-related secret from their romantic partner. Nearly a third (30 percent) reported spending more than their partner would like, and 23 percent secretly racked up debt.

Debt can be a major cause of stress in a relationship.

Fortunately, the relief that comes from resolving financial difficulties has the power to improve relationships once bogged down by money troubles. Those who work together to achieve a common goal, like chipping away at those student loans or paying down that credit card bill, will likely grow stronger and will have a greater ability to communicate honestly.

Psychological challenges of paying off debt

While there are many advantages to paying off debt, you might experience some challenges once you’re on the other side, too.

An altered link between spending and happiness

Once you’ve felt the relief of debt payoff, your feelings between money and happiness can change. Purchasing a designer handbag out of your price range, for example, may bring you immense short-term joy. Yet the happiness that you’ll experience from a dinner with friends or a weekend getaway will be more fruitful in the long run.

“People tend to expect that certain types of purchases are going to make them a lot happier than they really will. It’s not that they won’t make them happy at all, but the bang for their buck is much smaller than they anticipated,” says Howell.

Dealing with a new set of temptations

After you’ve put your last debt payment behind you, it’s not uncommon to experience a new set of financial temptations. “Quite often after paying off debt, people tend to gravitate toward taking on more debt, or they will simply unconsciously spend the extra money that’s available,” says Patterson.

To fight off the urge to fall back into previous spending patterns, Patterson suggests setting aside the same monthly amount you owed during debt payoff into a high-yield savings account or taxable brokerage account.

“Now, instead of paying interest to a bank or financial institution, they can begin growing assets for their retirement or a future purchase. Employers are typically able to automatically deposit a portion of your paycheck into a separate account, so you won’t even have to think about saving,” says Patterson.

Where to start

Debt payoff can be a long, tedious journey, but the psychological rewards of doing so will benefit you in the long run. The most important thing to remember on this journey is that you have plenty of options and resources at your disposal.

Make sure you’re aware of every alternative repayment option, debt payoff calculator and financial tool (like a balance transfer credit card or a debt consolidation loan) at your fingertips. Once you know your options, stay consistent and remember the long-term goal at hand to set yourself up for steady financial footing in the future.

Most importantly, ask for help if you need it before embarking on your debt payoff journey.