A debt spiral can be a significant obstacle to reaching your financial goals. If you have a variety of debt, like credit cards, student loans, car loans, and mortgages, you may find yourself trapped in an ongoing spiral of debt as your payments go toward growing interest.
Getting out of a debt spiral creates financial stability, but it can be challenging and take time. Here are some strategies you can implement to improve your financial situation and break the debt cycle.
Key Takeaways
- Getting caught in a spiral of debt often happens slowly as debts accumulate.
- Debt relief services can help you get back on track financially by negotiating with creditors.
- It's important to prioritize how you'll pay your debt obligations.
- Consider reexamining the behaviors and attitudes about money that lead to your debt.
How the Debt Spiral Begins
For many people, the slide into debt begins with one loan, such as student loan or a mortgage. These loans can be considered "good debt" if they help you improve your financial health. For example, a student loan can help lead to a career that has good income and a mortgage can help you build an asset.
Taking out any kind of loan immediately means you must have enough money to cover those monthly payments. Carrying debt can negatively impact your credit score. Although if you make reliable payments over time, your credit score can increase.
If you can manage your current debt you may avoid a debt spiral. However, trouble can begin if you take on riskier debt like credit card debt or other forms of revolving debt. Credit cards tend to have higher interest rates. If you don't pay off the balance each month, you will have to pay interest on the remaining balance the following month. This is how a debt spiral can begin.
Certain types of loans, including payday loans, which carry high interest rates can lead to a high expense that may cause you to borrow more money to pay it off. This can result in a dangerous cycle of borrowing in which you may incur debt at triple-digit interest rates.
Breaking the Debt Spiral
The first step getting out of a debt spiral is to stop borrowing money. Credit cards are a common cause of a debt cycle, so try to avoid spending any more on them.
Try to pay in cash, write a check, or use a no-fee debit card to make your purchases. This way, you will not be charged any more interest on your purchases.
Next, examine your income and expenses. Creating a budget that tracks your monthly income and expenses will show you whether you need to make changes, such as by cutting back expenses or perhaps increasing your income. With a budget, you can determine how much extra money you have to put toward paying down your debt faster.
You may need to make lifestyle changes to cut costs such as by eating out less or spending less on entertainment. If your debt cycle is severe, you may need to downsize your living space or trade in your car for a less expensive one.
Tip
If you struggle with making and sticking to a budget each month, consider using a top-rated budgeting app to make the task easier.
Create a Debt Repayment Strategy
Once you've determined how much you can afford to pay toward debt repayment each month, you'll want to plan a repayment method. There are several strategies you can use. Two popular ones are the debt snowball and the debt avalanche methods.
With the debt avalanche method, you aim to pay off your highest-interest debts first. After you make all your minimum payments, you put extra money toward the debt with the highest interest rate. This will result in the most financial savings by reducing the interest you pay. It can also help you pay down your debts faster.
With the debt snowball method, you instead allot your extra money toward the debt with the lowest balance after paying the minimums on your other debts. The debt snowball can provide motivation as you pay off your small debts quickly.
If you are deep in a debt spiral and cannot afford to keep up with payments, you can consider other options. You may want to consult a nonprofit debt counseling agency to help you develop a plan with creditors to repay your debt in regular payments with a debt management plan.
You can also use a debt relief company to help you negotiate a lower amount if you are severely behind on payments. Debt relief companies generally work with unsecured debt that is not backed by an asset.
Consider ways to make your debt less expensive, such as taking advantage of a 0% balance transfer credit card offer or getting a debt consolidation loan.
The Next Steps
As you make headway paying off your debts and sticking to your monthly budget, you can turn to other financial goals. For example, you may want to begin putting extra money toward an emergency fund or start saving for retirement with a tax-advantaged account.
Ideally, you'll want to have enough money in an emergency fund to cover expenses for at least several months. This way, you can cover unexpected expenses like medical bills or auto repairs and avoid another debt spiral.
Don't pay any upfront fees to a debt relief company without having a written agreement about what they'll do for you first. And if a debt relief company makes promises that seem too good to be true, they probably are.
Which Is Better - the Debt Avalanche Method or the Debt Snowball Method?
The right debt repayment strategy for you will depend on a number of factors about your financial situation like your income and goals. In general, the debt avalanche method will be better for your finances because it will save you the most in interest. However, some people find they are more successful with the snowball method because paying off smaller debts faster keeps them motivated.
Do Debt Consolidation Loans Hurt Your Credit?
Applying for a new loan will require the lender to conduce a "hard credit check," which can have a small and temporary negative impact on your credit score. If you use the loan responsibly to reduce your overall interest payment and reduce your total debt load, a debt consolidation loan can potentially help you improve your credit score.
Can I Use a 0% Credit Card to Pay off a Loan?
You can use a credit card with a 0% introductory rate to help you pay down your debt, but it's important to use it responsibly and to have a repayment plan. You can transfer higher debt to your 0% credit card, and then all of your payments will go toward reducing your principal. However, if you don't pay the balance off by the time the introductory period ends, your debt spiral could continue.
The Bottom Line
To break the debt spiral, you'll need plenty of patience. Any approach that motivates you to take action and stick to your plan is worthwhile. Remember, building up those outstanding balances took years (possibly even decades). Recovery will be a similarly slow process.
