What is a debt cycle and how can you get out of it?
Getting trapped in never-ending debt can be difficult to get out of. However, with some frugality and effort you may be able to break the debt cycle.
If you are continuously borrowing more money to pay off debts that you cannot get out from under, then you have found yourself in a debt cycle or debt trap. With that knowledge, you can begin to take steps to break the cycle. It won’t be a walk in the park and besides putting in a fair amount of effort, it will require planning and frugality.
The longer you let the cycle continue, the more at risk you are of having your balances balloon as interest accrues, putting you further underwater. As well, it could become more and more difficult to repay even the minimum amount you owe each month resulting in missed payments, or worse a default.
What is a debt cycle?
If you are taking out new loans or using one credit card to pay off another without reducing the overall amount that you owe, you’re in a debt cycle. This could be because you spend more than you earn, using credit cards to cover the gap.
You could end up in a debt cycle due to some sudden disruption in your life. Perhaps a major unexpected expense or loss of income that you don’t have enough savings to cover or tide you through.
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How can you get out of a debt cycle?
If your debt exceeds 50% of your income, that is considered a burdensome amount to manage. You can calculate your debt-to-income ratio by tallying up your monthly obligations, bills, rent and other set expenses along with the minimum payment you must make on outstanding credit card and loan balances. Take that amount and divide it by your monthly income before taxes.
Once you have a picture of your finances, you can create a budget to see how much money you have after you’ve covered the basics and the obligatory. While easier said than done, you will want to put some money aside for a rainy day and discretionary spending, while directing as much as you can to paying down balances you are carrying.
If at all possible, see where you can cut back spending to dedicate more financial resources toward repaying credit card debt or loans, targeting those with higher interest rates first. Avoid taking out new credit, racking up additional charges on your credit cards, or cancelling a credit card once you’ve paid it off.
Best to lock those that have a zero balance in a drawer, as maintaining the credit limit will lower your credit utilization rate which will help with your credit score down the road. This should in turn help bring down the interest rate that you will be charged once you’ve gotten out of your debt cycle.
Additional steps that you can take are finding other sources of income through a side hustle, or earning overtime at your current job if feasible. You can also try talking to your creditors, explaining your situation. You may be able to set up a payment plan through a hardship program.