What Is a Debt Relapse and How Can You Recover?

Young couple examining home finance

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A debt relapse is what it sounds like: You've conquered your debt and paid everything off, until one day you realize that is no longer the case. And now you're asking yourself, "Do I actually enjoy paying off loans? Because it seems like that's all I do."

Fortunately, if you find yourself in a debt relapse, you can always bounce back—especially if you quickly mobilize and forge a plan to reestablish good habits, like paying off your credit cards every month. Here's how to recover from a debt relapse.

1. Conduct a Debt Audit

Figuring out what went wrong doesn't have to be a long, drawn out ordeal. Start by asking yourself, How did this debt relapse happen?

There are several steps you can take to do a comprehensive debt audit. Your main goal? To assess what debts you now owe and why.

  • Look at your credit report. Start to craft a debt audit by getting your credit report and looking to see what debt accounts are listed there. You can get a free credit report from all three credit reporting agencies—Experian, TransUnion and Equifax—at AnnualCreditReport.com. You can also get your free credit report from Experian and check it as often as you'd like. Be sure to also note the accounts that don't get reported to the credit bureaus.
  • List out all your debts and their balances. Whether you check your credit report or simply review the bills you pay each month, you'll want to compile a list of every creditor you owe money to and how much you owe on each account.
  • Take a look at the past six months of bank and credit card statements. Life moves fast, and it's easy to forget all of the purchases you've made in recent months. That's why it could be helpful to examine your spending from the past several months. For instance, maybe you had to take your dog to the veterinarian a few months ago, and you spent an unexpected $800 on treatments. If you didn't have the money in your bank account to pay for it, you may have pulled out a credit card—and then continued to use it for other purchases. Sifting through your bank and credit card statements, you'll start to find reasons why you wound up in debt. And once you find those reasons, you can start to create solutions, like putting more money into a savings account for emergencies (more on this below).

If you go through these steps and still truly don't know what triggered this debt relapse—or your finances are especially complicated—you may want to think about working with a professional, like a financial advisor or a credit counselor.

2. Create a Plan to Pay Off the Debt You Now Owe

If you're in the midst of a debt relapse, you'll want to dust off your old playbook of how you paid off previous debts and use those tactics again. Here are some popular debt payoff strategies:

  • The debt snowball strategy: The debt snowball method involves paying down high-interest debt, especially credit card debt. You'll make the minimum monthly payments on all of your debts except the one with the lowest balance. For that one, pay as much as you can afford to. Once that debt is paid off, focus all of your extra money on paying off the debt with the next lowest balance. And repeat. Getting quick wins by paying off smaller debts can motivate you to push on.
  • The debt avalanche strategy: With the debt avalanche method, you're making the minimum monthly payments on all of your debts except the one that carries the highest interest rate. All extra, available money goes toward that account. Once it is paid off, put your extra funds to the account with the next highest interest, and so on until all your debts are paid.
  • The "whatever feels right" strategy: Make your own rules about paying off debt. If you decide neither the avalanche or snowball methods are paths you want to take, determine how you will attack your debt. A credit card payoff calculator can work wonders here.

3. Build a Better Budget—and Stick to It

Debt relapses can occur because your budget simply isn't realistic. You may have too strict of a budget, and then when you find yourself running out of money, you'll pull out your credit card again. Or your budget doesn't account for all your expenses in a month.

We ask a lot of budgets. They have to allow us to pay monthly bills with money left over to go into savings and retirement accounts. You may want your budget to help you save for your kids' college education or a vacation. You'd also like to have money in the budget to buy an occasional takeout meal or splurge on an impulse purchase.

But until somebody invents something better than a budget, it's important to have one. Fortunately, there are many different budgets that work for different spending personalities.

If you're working on a budget, there are several budgeting best practices to keep in mind:

  • A budget isn't something that you set and forget. You may want to review it weekly and make adjustments as necessary.
  • Budgeting isn't easy to do on your own. You could take a look at budgeting apps and see if there's one that you think could help you budget better. If you'd prefer to go it alone, set aside enough time to account for all your spending
  • Give yourself a break. Maybe there isn't enough money in the budget for discretionary purchases. You could give yourself an allowance—yes, an adult allowance—and see if that gives you enough freedom to treat yourself but also stay on budget.

If you're heading toward a debt relapse, the problem probably lies somewhere within your budget. Another issue could be that you've had unexpected expenses that didn't fit into your budget—and no emergency savings to come to the rescue. Time to remedy that.

4. Start an Emergency Fund

Creating an emergency fund is the best strategy to prevent a future debt relapse. Instead of relying on your credit card to protect you from financial emergencies, start an emergency fund, preferably in an interest-bearing savings account. Add money to your emergency fund every month, so that if you do have to raid it to, for instance, pay for a car repair, you can pay yourself back gradually.

Unlike a credit card, if you don't pay your emergency fund back within a month, you won't charge yourself interest. Still, be sure to put money into your emergency fund regularly. Experts suggest aiming for three to six months' worth of living expenses. If that seems unreasonable as you are trying to avoid a debt relapse, just start where you can. Even setting aside $25 a week works—and it could save you from relying on debt down the road.

5. Pay Off Your Credit Card Every Month

If you've recently paid off debts, you may have a significant amount of available credit. You might assume that carrying a small balance isn't a big deal. But a small balance can eventually become a medium-sized balance, and the next thing you know, your credit cards are maxed out.

And let's dispel the fallacy that carrying a balance from month to month is necessary to help your credit. It isn't. The best way to use your credit cards is to use one that offers rewards, only charge what fits into your monthly budget and pay your card in full every month. Credit cards are an excellent tool for managing cash flow and saving money, but if you're paying hefty interest charges every month, it can become increasingly difficult to pay off that debt.

6. Stick With Cash and Debit Cards

If you really fear a debt relapse and don't trust yourself with available credit, stay away from credit cards for the time being to keep yourself from suddenly owing more than you can pay.

Eventually, however, you're going to want to get back into the game and use credit cards—even if sparingly. Showing lenders that you can responsibly use a credit card will help you get better terms and rates on loans in the future, whether on a home, a car or a personal loan.

But there is no rush. There's no reason you can't give yourself six months or a year before testing the credit card waters again. In the meantime, make purchases strictly from available funds in your bank account. And then, when you do begin using a credit card again, make it your mantra that you will only pay for things you know you can pay off each month.

The Thing About Debt Relapses

If you find yourself in a debt relapse, don't beat yourself up too much. Pay off what you owe and develop a plan to stay out of debt, and you may never experience a debt relapse again.

Having a plan in place includes keeping a close eye on your finances and credit. You can monitor your credit with Experian's free credit monitoring. Seeing your progress and how paying down your debt is helping your credit will likely motivate you to stay on track.