The Able Worry More? Debt Delinquency, Financial Capability, and Financial Stress
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Connected with: @kim2006 @heo2020
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xiao2022 - p. 138
Debt is an indicator of resource deficiency and negatively associated with subjective wellbeing or positively associated with financial distress (Tay et al., 2017) and psychological distresses (Brown et al., 2005).
xiao2022 - p. 138
In this study, debt delinquency refers to being late in debt repayment (Xiao & Yao, 2014). Researchers use different terms for perceived financial difficulties such as financial anxiety, stress, or distress (Archuleta et al., 2013; Friedline et al., 2020; Serido et al., 2014a). To be consistent with the literature of family economics, we use financial stress defined as a psychological state worrying about personal finance. It is important to understand to what extent that debt delinquency is associated with financial stress and identify factors that can help mitigate the association and reduce financial stress. This study focuses on one of such factors, financial capability.
xiao2022 - p. 139
inancial stress has been defined variously by researchers. For example, it is defined as “the extent to which individuals perceive that their financial demands exceed their ability to meet those demands (Serido et al., 2014a, p. 339) or “financial-related psychological stress or distress when they do not have adequate income, wealth, or debt to afford economic hardship” (Friedline et al., 2020, p. 10). Also, various researchers use different terms to indicate similar construct such as financial strain (Serido et al., 2014b), financial anxiety (Archuleta et al., 2013), financial uncertainty (Romo, 2014), and economic worry (Lai, 2011). In this study, we define financial stress as a psychological state worrying about personal finance.
xiao2022 - p. 139
Financial stress is an indicator of financial subjective wellbeing while financial subjective wellbeing is an indicator of subjective wellbeing. More specifically, subjective wellbeing is defined as a state of being mentally healthy that includes three components: having positive affect, lack of negative affect, and life satisfaction (Diener, 1984)
xiao2022 - p. 139
From the economic perspective on the life-cycle theory of saving (Modigliani, 1986), consumer income level over lifespan is stable so as their consumption level. However, consumers face many risks that result in income shocks, in that case, consumers need to borrow to smooth consumption. In addition, consumers need to borrow to live a normal life (Xiao & Yao, 2020).
xiao2022 - p. 140
In the context of this study, debt delinquency is considered as a stressor. Financial stress is considered the outcome of this adverse life event, an indicator of subjective financial wellbeing. To reduce financial stress, people seek available resources to cope the situation. In this study, we focus on financial capability, a form of human capital (Huston, 2010) as a helpful resource to be used to overcome life difficulties.
xiao2022 - p. 141
Debt delinquency is positively associated with financial stress.
xiao2022 - p. 141
Financial capability can be defined in various ways (FINRA IEF, 2019). It sometimes used as a synonym of financial literacy. Financial literacy refers to consumer ability to make optimal financial decisions (Lusardi & Mitchell, 2014). It also refers to financial knowledge and application of the knowledge (Huston, 2010). In this study, we define financial capability as the individual ability to apply appropriate financial knowledge and engage in desirable financial behavior for achieving financial wellbeing (Xiao et al., 2014).
xiao2022 - p. 141
To study the moderating role of financial capability in the relationship between debt delinquency and financial stress, the potential effect of the interaction term between debt delinquency and financial capability on financial stress is examined
xiao2022 - p. 141
We used the 2018 National Financial Capability Study (NFCS) dataset sponsored by the FINRA Investor Foundation Education. The 2018 NFCS dataset was collected between June and October 2018, from roughly 500 respondents from each state and District of Columbia with oversamples of Oregon and Washington.
xiao2022 - p. 142
The 2018 NFCS provides three types of debt delinquencies such as mortgage (E15), credit card (F2_4) and student loan (G35). We created three binary indicators of debt delinquency coded as 1 if respondents were behind in each type of debt payment over the last 12 months, and 0 otherwise (i.e., no delinquency problem or non-borrowers).
xiao2022 - p. 142
Following previous research (Xiao et al., 2015; Xiao & O’Neill, 2016), the financial capability index was estimated by summing Z scores of four financial capability measures; (1) objective financial knowledge (0–6), subjective financial knowledge (1–7), perceived financial capability (1–7) and desired financial behavior (0–6).
xiao2022 - p. 143
In this study, we constructed four ordinary least squares regression models to analyze the association between independent variables (debt delinquency, financial capability, control variables) and four dependent variables, level of financial stress (baseline model, Model 1). Further, we investigated the moderating role of financial capability by adding the interaction terms between debt delinquency problems and financial capability (Model 2).