The debt cycle—and how to break it

By Rebecca Lake

Reviewed by Jill Cornfield

Jun 26, 2024

Read time: 6 min

Young couple at kitchen table looking at finances-avoiding debt cycle.

Key takeaways:

  • A debt cycle is a pattern of taking on debt that you can't reasonably pay off. 

  • Overspending is one, but not the only, reason people fall into a debt cycle.

  • Budgeting and seeking practical solutions can help break a cycle of debt.

Getting caught in a debt cycle is something that happens to plenty of people. What matters most isn't how you got into debt, but rather your plan for digging out. 

You've got the power to reset persistent patterns and create new financial habits—but you might need a little help figuring out where to start. When you learn to spot the signs of a debt cycle, you're already on your way to breaking it. 

Here's how to do it. 

How to recognize the signs of a debt cycle

A debt cycle is an ongoing pattern of taking on more debt than you can afford to pay off. Some of the signs that you have too much debt include:

  • You don’t know the details of your debt, including how much you owe and the interest rates.

  • You make minimum payments on your credit cards and continue to charge new purchases.

  • You have a high debt-to-income (DTI) ratio, which measures how much of your income goes to debt each month.

  • You use one debt to pay off another without addressing what led to the debt in the first place.

  • You pay late or can’t afford to keep up with your payments at all. 

Experiencing one or all of these scenarios could point to a cycle of debt. 

Causes of the debt cycle

It's easy to assume that a debt cycle is the result of overspending or bad financial choices, but that's not always true.

People can end up in debt for other reasons, some of which are outside their control. For example:

  • Your wages aren't keeping up with inflation, so you're living paycheck to paycheck and using credit cards to get by.

  • A job loss puts you out of work and you don't have an emergency fund, so you use credit to cover essential living expenses. 

  • You're going through a divorce (or coming out of one) that's had a big impact on your finances, and you're using credit cards until you get back on your feet. 

  • Someone in your family has a serious and urgent need for medical care. The costs create new debt and, at the same time, the medical situation leaves you or your family member unable to bring in the usual amount of income.

Everyone's situation is different, but what's helpful to remember is that there are solutions for dealing with a debt cycle, no matter how you got there. 

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

Effects of the debt cycle

Living in a debt cycle can have negative side effects that you feel on several levels. 

For instance, feeling constantly stressed or anxious about debt can take a toll on your mental and physical health. It's hard to get motivated to do something about your debt when you're mentally beaten down by it. 

Aside from that, your financial life can be impacted in different ways. 

Making just the minimum payments may not make a huge dent in your debt month to month if your credit cards have high interest rates. The longer debt balances linger, the more they can end up costing you in interest. 

Then there's the impact on your credit. 

Maxing out credit cards can hurt your credit scores, which could make it harder for you to borrow money. If you're able to get a loan, a lower credit score could mean paying higher rates or more fees, and that means even more to pay off.

Breaking free from the debt cycle

If you're in the debt cycle, here's what you need to know right now: 

All is not lost. You can regain financial stability and break free of debt; it just takes some planning. Getting out of the debt cycle usually involves both short-term and long-term moves. Here's how to do it.

  • Embrace budgeting. Making a budget might seem boring or restrictive, but it's hard to put the brakes on debt without getting a firm grip on spending. You can make the process easier by using a free budgeting app to organize expenses and income. 

  • Track spending. If you want to get out of debt you need to know where your money goes. Tracking expenses using a spreadsheet, notebook, or budgeting app can give you insight into what you might be able to cut out. 

  • Build emergency savings. Having a rainy day fund can help you avoid debt when an unexpected expense comes along. Instead of turning to a credit card or loan, you can pull money from your emergency stash. You can start small and aim to save $500 or $1,000, then work your way up to building a larger emergency fund. 

If overspending contributed to your debt cycle, then there are a couple of additional tasks to tackle. 

First, put the cards away and commit to not using them. You could cut them up, close the accounts, freeze them in a block of ice, turn them off if your card issuers offer that feature, or just make a firm commitment not to use them. If you keep the accounts open, it’s a good idea to delete the card numbers from all of your shopping sites. To break the debt cycle, it’s best to stick with a debit card or cash.  

Second, figure out why you ended up in debt. Be honest with yourself, but don’t forget to give yourself a big hug. This isn’t about right or wrong, bad or good. It’s about knowledge. Overspending, impulse buying, emotional spending—they can all be triggered by things you might not even fully understand. If you had unhealthy spending patterns in the past, it may be easier to change them once you acknowledge them.

Getting help to break the debt cycle

You don't have to try to get out of the debt cycle alone. Talking to financial professionals can help you find a debt solution

You might try a credit counselor first. Credit counseling usually involves looking at your expenses, income, and spending to find a path forward. A counselor might recommend that you:

  • Get a debt consolidation loan to reduce the number of debts you have (and the number of payments you have to make) and possibly save money. 

  • Transfer credit card balances to a new card with a 0% introductory APR to temporarily save on interest. Balance transfer strategies are tricky, and could lead to more, not less, debt.

  • Enroll in a debt management plan, which is a structured plan to fully pay off your debts over three to five years.

You could also consult a debt expert who's familiar with debt resolution or an attorney who can advise you about bankruptcy. 

Debt resolution means negotiating with your creditors to accept less than the full amount you owe but consider it payment in full. The balance is forgiven. You might consider it if you mostly owe unsecured credit card debts and you can’t afford to fully repay your debts.

Bankruptcy is a legal process for getting rid of debts. If you qualify for Chapter 7, you could walk away from your unsecured debts but you might have to give up some things that you own. If you earn too much to qualify for Chapter 7, you might qualify for Chapter 13. That’s a structured repayment plan that lasts three or five years, but you don’t have to give up your assets. Both types of bankruptcy can pause a foreclosure on your home.  

What's next

  • If you don't know what you owe, create a debt inventory that includes your current balances, monthly payments, and interest rates. 

  • Review your budget to see how much you're spending versus how much you're earning each month. The goal is to find expenses you might be able to reduce or eliminate. 

  • Schedule a free consultation with a debt expert to discuss whether debt resolution might be right for you.

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

Jill Cornfield

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

Frequently asked questions

One sign that you're in a debt cycle is not being able to keep up with debt payments. If you've missed one or more payments for credit cards or other debts, you may need to seek debt help. Other indicators of a debt cycle include not being aware of what you owe, only making minimum payments, and repeatedly maxing out your credit cards.

If a debt goes unpaid for seven years it can fall off your credit reports. The debt itself doesn't go away. You still owe the money, and creditors may still try to collect.

A debt spiral or a debt trap are both other names for a debt cycle. They just mean that you're continuing to add to your debt, increasing the balances owed over time instead of paying them down steadily. Individuals can get caught in a debt spiral, but so can companies and even governments when spending and debt go unchecked.

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