How to break a debt cycle

debt cycle

Debt cycles are all too easy to fall into. It starts when you take out a loan, charges up your credit cards, or fall behind on your mortgage. Your interest balance goes up, so you struggle to pay off your debts at all. Then, an emergency arises, and without savings to fall back on, you have to take on more debt. 

Unfortunately, millions of Americans are trapped in long-term debt cycles they can’t escape. But with a little planning and some discipline, you don’t have to be stuck any longer. 

What is the first step to getting out of debt?

The first step to paying off debt is understanding your finances. Start with mapping out your monthly income against your debts and expenses. Once you’ve laid out your finances, you can approach your situation with a bird’s eye view and adopt a debt payoff strategy to help you break the cycle.   

Create a debt payoff strategy

Most experts recommend one of two debt payoff methods to break cycles of debt: the debt avalanche or the debt snowball strategy. 

Debt avalanche method

The debt avalanche method involves paying off your most toxic debts first. Essentially, you make the minimum payments on all your accounts. Then, you throw any extra cash at your highest-interest debt until it’s paid off. Once that balance reaches zero, you roll the extra cash onto the next-highest debt, and on down the line. 

This debt payoff strategy can come with more savings over time since you’re not wasting your income on interest payments. But if you have large balances on your accounts, you may not feel like you’re making progress for a long time.  

Debt snowball method

For larger balances, you may try the debt snowball strategy to feel like you’re making more progress. With this method, you pay as much as you can toward the debt with the lowest balance while making minimum payments on your other debts. Then, when your balance reaches zero, you roll the payment onto the next-lowest balance on the list. 

Typically, you’ll pay more in interest over time with this method. That said, you’ll wipe out individual debts faster, building up momentum to tackle the biggest debts.  

9 tips to help you break out of a debt cycle

Paying down your debts is only half the fight. If you want to break your cycle of debt once and for all, these tips can help.

Build up an emergency fund

An emergency fund is a safety net that catches you when life happens. Whether you encounter unexpected medical bills, your car breaks down, or you lose your job, your emergency fund can save you from taking on more debt in the future. 

Create a budget and stick to it 

Creating a budget is money management 101. With a clear picture of your finances and a plan for every dollar, you can avoid digging yourself into another hole once you’re debt-free. 

Ditch your credit cards

If you’re the kind of person who struggles with impulse shopping and credit card debt, consider cutting them up to break the overspending cycle. You can also delete your credit card numbers from your phone’s digital wallet. When you have to physically find your card to make a purchase, you have more time to stop yourself from overspending. 

Avoid shopping without a list

Whether you’re picking up groceries or household items, make a list before you leave the house. Using a list can reduce the temptation to spend and remind you exactly what you need when you’re navigating a busy store. 

Pay more than the minimum amount

While it’s not always possible, if you can pay more than the minimums on your debts, you’ll pay them down faster. Plus, you’ll save more money on interest.  

Buy what you can afford

Just because you can pay for something now – or put it on a credit card – doesn’t mean that you can actually afford it. When making a purchase, ask yourself if you can afford to pay for it in full, not if you can make the debt payment.  

Ask your credit card providers for a better rate

Many lenders will work with you to help you pay your debts, especially if you have a good credit history or an established relationship with the company. Try calling your credit card providers to see what your options are for reducing your interest rates.

Apply extra cash toward debt

If you have cash leftover after paying your bills and contributing to your emergency savings, consider putting it toward your debts. The faster you pay off debt, the quicker you’ll free up your income.   

Track your spending

Staying on top of your spending can help you control where your money goes – and identify leaks in your budget. At the end of the month, you may be surprised to see how much you’re spending on daily coffee runs or weekly takeout with friends. 

Break your debt cycle now to achieve financial freedom later

Breaking a debt cycle is difficult – but it can be done. And the sooner you get your debt taken care of, the sooner you’ll free up your income to start saving toward your goals.

What is a debt cycle?

A debt cycle is a pattern of borrowing money that leads to increased debt, higher interest payments, and eventually default.

How can loans trap someone in a cycle of debt?

If you take out loans you can’t afford, or an emergency forces you to take on more debt, you run the risk of interest piling up. Over time, you’ll erode your savings trying to catch up, and may have to take on more debt to cover your bills. 

Should you pay off debt as soon as you receive the credit card bill or wait till the due date?

At a minimum, you should always pay off your credit card by the due date to avoid interest and late fees. But if you can make payments earlier, more power to you! 

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