Getting out of debt is challenging, especially if you're carrying large balances on high-interest credit cards or loans. Even if you are making some progress on paying down debts, you may be frustrated by the slow pace of repayment, which could lead to actions that may thwart your efforts.
If you find yourself in a debt spiral, the first step in finding your way out is to identify and address the root of the problem. Here are five common reasons you may be stuck in debt, and steps you can take to begin making your way out.
1. You're Only Making the Minimum Payment
Only paying the minimum on your credit card balance each month will protect your payment history from damage, but it's an expensive option.
Carrying a balance month to month means incurring interest charges not just on your outstanding balance but on all new purchases. That's because if you carry a balance, you lose your credit card's grace period. The outcome is that your minimum payments may mostly go toward battling interest charges, rather than paying down your balance.
For example, if you have a $5,000 credit card balance with an interest rate of 14.5% and a minimum monthly payment of $109, paying only the minimum due each month will mean staying in debt for six years and paying $2,199 in interest (assuming you don't add any additional purchases to the balance). But increasing your monthly payments to $300 per month will mean spending less than two years in debt and paying $593 in interest. You can refer to your credit card statement to see how much you'll wind up paying in interest if you only make the minimum payment, as card issuers are required to share that information.
How to Pay More Than the Minimum
Whatever your balance, the key to getting out of debt is to start paying more than the minimum now. Pay the maximum you can afford to see your debt off sooner—and see improvement in your credit score too.
Here are some methods for paying more than the minimum due:
- Debt snowball method: With the debt snowball method, you'll reduce your debt by starting with your smallest credit card balance first. You'll make the maximum payment you can afford to pay on this account, while still paying the minimum on your other cards. This method can help you stay motivated by seeing your number of balances dwindle more quickly.
- Debt avalanche method: With the debt avalanche method, you'll reduce your debt by starting with your highest-interest credit card account first. For example, if you have three credit cards with interest rates of 16%, 20% and 23%, you'd start with the 23% APR card first. This method will save you the most money over time.
- Reduce expenses: Finding ways to cut back your expenses can help you free up funds for debt repayment. For example, consider cutting back on streaming subscriptions, cable, retail or dining. Save at the grocery store by shopping sales and using coupons, or challenge yourself with a no-spend challenge.
- Seek additional income: Beyond decreasing what you spend, bringing in more cash and dedicating those funds to debt repayment can help you pay off debt faster. Look for a flexible side hustle, such as driving for a ride-hailing app or tutoring. You could also consider working an additional part-time job or, with the right timing, ask for a raise from your current employer.
2. You're Not Using a Budget
Without a budget, it's easy to lose track of your spending and fall into debt. Not only does a budget help you prevent overspending to avoid debt in the first place, but when you're already shouldering debt, a budget can help you get out. By creating a budget, you'll be able to pinpoint areas where you're overspending and direct more funds toward your goal of paying off debt.
How to Create a Budget
There are several types of budgets from which to choose, including budgeting apps that can make the process simpler. One budgeting method, the 50/30/20 budget, has you direct 50% of your budget toward your core essentials, 30% toward discretionary spending and 20% toward savings and paying off debt. But you could always tweak this budget to throw more money at your debt.
3. You Tend to Make Impulse Purchases or Overspend
If you spend more than you earn, taking on debt is inevitable. The solution is to follow a budget and differentiate your needs from your wants. Maybe you're overspending on retail, dining out more than you can afford to or otherwise living beyond your means.
It can be tricky to break the habit of overspending, but there are some simple actions you can take to help.
How to Limit Unnecessary Spending
- Track your purchases. Go through all of your transactions. Highlight necessities (housing, groceries, bills) in one color and everything that you didn't have to buy in another. Be as objective as possible. Then tally up your total spent on needs and wants. Are there ways you can cut back in the wants category?
- Unsubscribe from marketing emails. If your favorite retailers are dropping multiple doses of temptation into your inbox each day, it's easy to convince yourself you've got to order that new sweater or new cookware. Rather than fighting temptation, automate the solution: Simply unsubscribe or unfollow.
- Implement a purchase waiting period. Instant gratification is so often the enemy of long-term financial stability. One practical solution is to create a waiting period for anything you wish to buy. Waiting even just one week between the initial impulse to buy something and making the purchase gives you time to do a gut check to ensure it's a sound financial move.
4. You Have No Emergency Savings
Because financial emergencies can happen anytime, lacking emergency savings is a big risk factor for ending up in debt. If you're hit with an urgent expense that you can't afford, you may rely on credit cards or loans to get you through. A medical emergency, hefty car repair bill or a sudden dip in income can all derail your budget and, when you don't have the cash, lead you into debt.
Even as you're actively working to pay your way out of debt, many experts recommend that you also set aside some money for emergency savings now. Putting money into savings while your debt accrues interest may seem counterintuitive. But if an emergency comes along while you're in the debt repayment process, your hard work could fall apart as you're forced to add more charges to your credit card.
How to Create an Emergency Fund
Try setting aside a portion of each paycheck into an emergency fund, even if you can only afford to save a small amount for now. Just $20 a week, for example, can help you save over $1,000 by the end of the year.
Consider keeping your emergency fund in a separate bank account or better yet, a high-yield savings account that earns above-average interest. Using a separate account can help you easily distinguish your emergency savings from your everyday checking account. And make sure you use the money only for emergencies.
5. You Spend Emotionally
Splurging hard after a stressful week, ordering in when you're feeling down or even going all out on dinner and drinks with friends when you're in the mood to celebrate—emotional spending takes on many forms. Everyone should be able to treat themselves when they need it, but if your emotional spending is getting in the way of your efforts to get out of debt, it can be a problem.
If you're struck with the urge to overspend when you're feeling excited or happy, sad or stressed out, you're likely making emotional purchases. This isn't necessarily a bad thing, so long as you spend within your means. But if emotional spending results in credit card bills that are higher than you can afford to repay, you may need to reconsider when you reach for your credit card.
How to Reduce Emotional Spending
Cutting back on spending isn't easy, but there are cheap alternatives to the splurging you do when you're in the mood to celebrate or when you need a pick-me-up after a bad day. Consider less expensive tweaks like:
- A lavish-feeling but economic home-cooked meal
- An at-home pedicure
- A thrift store alternative to retail therapy
- Your favorite game day foods foraged in the freezer aisle, rather than delivered at a steep cost
Kick Debt to the Curb
In addition to the five reasons above, one big reason you're still in debt may be that you haven't come up with a specific, actionable plan for how you'll get out. Get the ball rolling by creating a debt payoff strategy, such as the debt snowball method or debt avalanche method mentioned above.
You can also consider contacting your lender to ask about hardship programs, which may allow you to access a lower interest rate. If you need help getting out of debt, learn about how to find reputable credit counseling.