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A debt spiral can be a significant obstacle to reaching your financial goals. If you have a variety of debts, like credit cards, student loans, car loans, and mortgages, you may find yourself trapped in an never-ending spiral of debt as your payments only go toward the growing interest. Getting out of a debt spiral means financial stability, but sticking to a repayment plan and/or working with a debt relief service can be challenging and will take time.
Key Takeaways
- Getting caught in a spiral of debt often happens slowly as interest accumulates.
- Debt relief services can help you get back on track financially by negotiating with creditors on your behalf.
- Consider reexamining the behaviors and attitudes about money that led to a debt spiral to avoid getting trapped in another one in the future.
How the Debt Spiral Begins
For many people, the slide into debt begins with one loan, such as a student loan or mortgage. These loans can be considered “good debt” if they help improve your financial health. For example, a student loan can lead to a career with a good income, and a mortgage can allow you build equity in a home. Carrying debt can negatively impact your credit score, but so long as you make your monthly payments on time, your credit score should eventually increase.
However, trouble can begin when you take on riskier debt, including 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’ll have to pay interest on the remaining balance the following month. And certain types of loans, such as payday loans (which carry high interest rates), can put you in a position where you have to borrow more money to repay them, resulting in a dangerous cycle of borrowing.
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 debt spirals, so avoid using them for the time being. Instead, try to pay in cash, write checks, or use a no-fee debit card to make your purchases.
Next, examine your income and expenses. Creating a budget will help you determine whether you need to reduce your spending and/or find an additional source of income. With a budget, you can find out how much extra money you have to put toward paying down your debt faster.
You might need to make lifestyle changes to cut costs, such as eating out less or spending less on entertainment. If your debt spiral is severe, you may even have 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 budgeting app.
Choose a Debt Repayment Strategy
Once you’ve determined how much you can afford to put toward debt repayment each month, you’ll want to select a repayment strategy. Two popular options are the debt snowball and the debt avalanche methods.
With the debt avalanche method, your goal is to pay off your highest-interest debt first. After making your minimum payments on all of your other debts, you put whatever extra money you can toward the debt with the highest interest rate. This option is often the most financially efficient because it reduces the amount of interest you’ll pay in the long run. It can also help you repay your debts faster.
With the debt snowball method, you’ll instead put your extra funds toward the debt with the lowest balance (while making the minimum payments on all of your other debts). While this strategy is typically the more costly of the two, the psychological benefits of quickly paying off your smaller debts can help you stay motivated.
If you’re deep in a debt spiral and cannot afford your monthly payments, then you may have to look at other options. For instance, you might consider working with a nonprofit debt counseling agency to develop a debt management plan with your creditors. If you’re severely behind on payments, you could also hire a debt relief company to potentially negotiate a lower balance on your behalf. Just keep in mind that debt relief companies generally only work with debt that isn’t backed by an asset (i.e., unsecured).
Important
Don’t pay a debt relief company any upfront fees without getting a written agreement of what it’ll do for you first. And if a debt relief company makes promises that seem too good to be true, they probably are.
Next Steps
As you make headway on paying down your debts and stick to your monthly budget, you can turn to other financial goals. For example, you may wish to begin growing 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 your expenses for at least several months. This way, you can cover unexpected expenses like medical bills or auto repairs and avoid another debt spiral.
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, such as your income and goals. In general, the debt avalanche method will be better for your finances because it will save you more in interest. However, some people find they’re more successful with the snowball method because quickly repaying smaller debts keeps them motivated.
Do Debt Consolidation Loans Hurt Your Credit?
Applying for any new loan will require the lender to conduct a hard credit check, which will have a minor (and temporary) negative impact on your credit score. However, so long as you make your monthly payments on time, using a debt consolidation loan to reduce your interest payments can potentially 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 in place. By transferring higher-interest debt to your 0% credit card, all of your payments will then go toward reducing your principal. However, if you don’t pay off this balance by the time the introductory period ends, then interest will begin accruing on whatever’s still outstanding.
The Bottom Line
To break a debt spiral, you’ll ultimately need plenty of patience. Remember, it can take years (possibly even decades) for a debt spiral to grow out of control. Recovery will likely be a similarly slow process, so any strategies that motivate you to stick with a repayment plan are worth considering.
