How to Get Out of a Debt Spiral

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.

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.

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.

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.

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.

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.