Opinion: Credit Scores Reflect More Than Risk — They Reflect Mental Strain; Lenders Must Respond

It may not be a tremendous leap to assume that people who have low credit scores also suffer from higher levels of depression and anxiety than those with better scores.

Trying to pay bills on time, being saddled with overwhelming debt, dealing with collection and legal action, and experiencing challenges associated with qualifying for credit products take a toll on people’s emotions.

Now an academic study, “Area-Level Credit Scores and Symptoms of Depression and Anxiety in Adults,” published in the May 2025 issue of the American Journal of Epidemiology confirms a connection between poor credit scores and compromised mental health, not just for individuals but entire communities.

Subprime lenders can and should use this information to support their prospective and current borrowers, manage risk for accuracy and compliance, and differentiate their company and services in a competitive market.

Oh, and to do the right thing for a struggling population.

The study analyzed data from 511,363 Pennsylvania adults across 80% of the state’s ZIP codes. It concluded that places where credit scores languished on the low end of the spectrum were associated with increased levels of depression and anxiety.

Since the subprime lending industry focuses its attention on people who have low or no credit scores, the data from the study are especially relevant.

First up is legal. Financial institutions are required to comply with Know Your Customer (KYC) guidelines and regulations. Although the process is designed to offset crimes such as money laundering, terrorist financing, and fraudulent activity, it’s also used for risk assessment and due diligence.

Because subprime lenders focus on borrowers who are at an elevated risk of default, compliance can be challenging. Lenders may require applicants to provide identification, proof of income, and bank statements, all of which may be particularly stressful to people who are experiencing depression and anxiety.

Credit deterioration and mental health issues are often concentrated in certain neighborhoods, too, so lenders need to be aware of not just individual issues but area-specific ones that may not be captured in standard risk models. This impacts everything from underwriting to portfolio diversification and pricing.

Being cognizant of higher rates of mental health issues can be useful at all stages of the lender-customer relationship, but earlier is always preferable. The fewer borrowers paying late, going into default, and declaring bankruptcy, the better.

Obviously, credit scores help lenders make the right decisions. The study analyzed the participants’ VantageScores, which range from 300 to 850. Scores between 300 and 660 are considered very poor to subprime.

Consumers have these low scores when they miss credit obligation payments, have a short credit history, and maintain too much debt in relation to their revolving credit limits.

Less influential but still part of the scoring model are the number of accounts they recently applied for and opened (fewer is better) as well as the total amount of credit they can access (more is better).

Credit scores only tell part of the story, however. The “why” is not addressed.

The vast majority of people who have low scores aren’t inherently irresponsible or incapable. Instead, they typically don’t earn much money, so their incomes can’t cover even the basics, and they borrow to close the gap. The products they turn to may have high fees, which makes getting out of debt expensive.

When there isn’t enough cash to make the payments, they fall behind. And that is indeed a depressing, stressful situation.

The study contends that low scores in specific areas can reflect a community’s access to capital, which may be shaped by historical and systemic factors such as underinvestment, poor-quality schools, and unsafe neighborhoods.

Providing positive financial services can help people in affected communities become the responsible borrowers they really are and rise above their circumstances.

Also worth noting is the link between mental health and avoidance. People suffering from depression and anxiety can be less apt to pay their bills on time and then fall into default. They may feel they’ll never get out of debt, so they don’t see the point in trying.

While financial strain can lead to mental stress, mental health issues can also exacerbate financial struggles.

Delinquencies and defaults are toxic to lenders, though, as they need assurance that payments will land by the due date for the duration of the loan’s term. This is the reason that payment history is the weightiest factor in a credit score.

Very often, a borrower can work with a lender to develop a feasible payment plan, but if they don’t reach out to request one, that option is lost. Many people are scared to communicate or don’t believe the outcome will be positive.

Eventually, debts are written off and go into collections, but mental health struggles can reduce the effectiveness of traditional collections methods. Psychological distress and being overwhelmed can lead borrowers to ignore calls. Income disruption and spending volatility can undermine even a well-structured repayment plan.

This research underscores the value of an empathetic, tailored communication strategy that serves subprime lenders’ interests. With a clear link between financial stress and mental health, lenders should embrace fair, compassionate practices in both lending and servicing to build trust and foster loyalty.

By thoroughly researching the root causes of emotional distress and financial struggles that contribute to credit damage, lenders can better manage risk and extend loans to suitable borrowers.

When payment issues emerge, swift action to offer hardship plans, such as flexible repayment schedules or skip-a-payment options, can make a difference. These solutions not only help borrowers stay on track but also set lenders apart in a competitive market.

Most people with low credit scores ultimately aspire to improve them. By also offering financial literacy programs, budgeting tools, and proactive support, lenders can empower borrowers to achieve their goals. In turn, this strengthens lender-client relationships and boosts business as it reduces delinquencies and charge-offs.