A debt spiral is when one falls deeper and deeper into debt, despite staying current on payments. It can happen when there is high-interest debt, or if there is sudden need of more debt or one loses income.
In a debt spiral, a person is so deep in debt, he needs to borrow even more to pay off their dues. But in doing so, his debt becomes bigger and tougher to repay, keeping him trapped in unending financial misery.
Besides the stress, loan repayment problems remain on the credit record for years and could make it difficult to get fresh loans in a time of need.
The spiral of debt often happens over time, rather than overnight, and breaking the cycle may take time as well.
Debt repayment plan will help in ending the debt cycle, but it also means re-examining the behavior and attitudes about money that lead to debt in the first place.
Example
If the credit card is not used properly i.e., if you might start buying things you would not buy with cash because you feel that the credit card gives you the power to buy more items. You get the illusion that a credit card is your money, when in fact, it is borrowed money; money you do not owe. This is where you begin to fall into a debt spiral.
And now, you will apply for another card, maybe two or three cards, and swear you will use them wisely. Unfortunately, you won’t and the amount of your income that goes towards servicing your credit card debt will keep on growing and before you realize it, as if all in one day, your credit card debts have gone out of control.
At the same time, you might have an auto loan, personal loan and a car loan too. So, the total burden of debt will begin to get too difficult to control, and you will start to use your credit card to repay them off. Sound like a great financial strategy? Wrong.
Doing so only increases your portion of the more expensive credit card debt, in a futile attempt to show you are repaying your often cheaper debts, credit card debts are often the most expensive.
Sooner than later, you will begin to pay off your card using another card, and at this point you will note that you are having money problems. It is like adding fuel to fire, the fastest way to get to the rock bottom.
You do not need to live in a permanent debt spiral. Debts can be repaid. You can climb out of the spiral, but will first need to acknowledge the situation that you are in. If it is time to do something about your debt, here are ways to get out of the debt spiral.
- List all the debts you have
- Create an accurate budget
- Decrease your outgoings
- Increase your Income
- Reach out for help if required
- Put money into savings account
- Stop yourself form getting into any more debt
- Avoid impulse buying
- Prioritize your debt
If you are careful with your budget, cut off your lines of credit and stay in control of your personal finance, you should see small changes over the course of a few months. You are unlikely, however, to see a big instant improvement. Stay optimistic. Subsequent debts will be paid off more quickly. You will not be struggling forever.