What Is a Debt Cycle?

Quick Answer

A debt cycle occurs when you continuously borrow money that you can’t pay back. Often, it looks like paying off one balance by borrowing more. Being caught in a debt cycle is difficult, but cutting spending and paying more than the minimum can help you get out.

A man stressed about being caught in a debt cycle.

A debt cycle happens when you continually take on more debt than you can afford to repay. You may borrow money to repay other debts, and, as interest charges continue to grow, find it more and more difficult to tackle your balances. Not only can getting out of a debt cycle become increasingly tricky, but feeling stuck in debt can be distressing.

Breaking the cycle isn't easy, but the first step is to understand what a debt cycle is, the signs you're in one and steps you can take to get out. Here's what you need to know.

What Is a Debt Cycle?

A debt cycle is when you continually take on more debt than you're able to repay. Often, this looks like taking out a new loan to repay your existing debts. As you go further into debt, more interest accrues, creating a big expense that becomes harder to get ahead of over time. Just affording your minimum payments can become such a burden that you may end up missing payments.

There are three common ways to end up stuck in a debt cycle:

  • A major, urgent expense hits and, without enough cash to cover it, you turn to debt.
  • You lose your income and don't have the savings to stay afloat without relying on debt. Or, your current debts become unmanageable in your tighter financial situation.
  • You spend more than you earn, leading you to carry credit card balances that you can't afford to pay off.

Signs You're in a Debt Cycle

Carrying too much debt is stressful, and paying off debt can be easier said than done. But the first step to improving your situation is to get clear on where you currently stand. Here are signs you may be stuck in a debt cycle.

1. You're Using Debt to Pay Off Debt

The most obvious sign you're in a debt cycle is when you're regularly paying your debt balances using other forms of debt. Resorting to more borrowing instead of addressing the root cause of your debt could keep you in debt longer.

That said, getting a debt consolidation loan or a balance transfer card that allows you to pay less in interest as you work to pay off your debt can be a good strategy—as long as you're committed to debt payoff. But if, for example, you use a debt consolidation loan to pay off your credit card debt and then continue to charge up the cards you just paid off, you could find yourself in a debt cycle from which it may be hard to emerge.

2. Your Credit Is Taking a Hit

Frequent credit applications, high credit utilization rates, multiple new accounts and, worst of all, defaulting on debt all hurt your credit score to varying extents.

Check your credit report for free through Experian and look for any negative information, such as late payments. These can be signs that you're struggling to manage credit and repay your debts effectively.

3. You're Paying High Interest Charges

One big sign of a runaway debt problem is carrying credit card debts or high-interest loans that are hitting you with large interest charges each month. These charges can sink you further into debt and possibly hamper your ability to make even minimum payments, let alone pay off your debt.

4. You're Living Paycheck to Paycheck

When debt becomes difficult to manage, money can feel even tighter as you struggle to afford your minimum debt payments while covering your regular expenses such as utilities, rent and groceries. You may find you're just trying to survive until your next payday. Living paycheck to paycheck and feeling constantly overburdened can be an indication that you have more debt than you can handle.

5. You Have a High Debt-to-Income Ratio

Debt-to-income ratio, or DTI, is a measure of how much debt you have compared with how much you earn. It's calculated by adding up your monthly obligations—namely, minimum payments on each of your debts, plus other recurring obligations like child support or rent—and dividing that sum by your monthly pretax income.

If your DTI is above 35% to 45%, that could be a sign that you're in more debt than is easy to manage. Anything above 50% is considered a burdensome amount of debt.

How Do You Get Out of a Debt Cycle?

Getting out of debt can be easier said than done.

Regardless of how you got into debt, these steps can help you break the debt cycle.

  1. Create a budget. To make a budget, create a list of your basic expenses—all those things you absolutely have to pay for every month, like your rent or mortgage payment, utilities, car payments, basic groceries and the like. Include at least the minimum payments on all your debts in this number. Subtract that from your monthly after-tax income to find out how much money you have left. You'll need to use that money for everything else—extra debt payments, any discretionary spending and, ideally, some money put into an emergency fund.
  2. Cut spending to the bone. If you feel your debt situation is dire, consider creating a bare-bones budget, which cuts out all but absolutely necessary spending. That'll free up more money to pay off your balances faster.
  3. Avoid using credit. If you're stuck in a debt cycle, you may want to go cold turkey on your credit cards. Use only cash or debit for your purchases and vow not to touch your credit cards while you focus on paying them off. Otherwise, you could end up taking on new balances after weeks or months of effort reducing what you owe. Just try to avoid taking the step of canceling your cards altogether; this can cause your credit utilization rate to jump up, causing damage to your credit.
  4. Consider a side hustle. If you have the extra time, consider taking on an additional part-time job or looking into gigs to add an extra stream of income. You can also see if your current employer will allow you to work overtime or pick up additional shifts.
  5. Talk to your lenders. Call your credit card company and let them know if you're struggling to repay your debt. They may allow you to enter into a hardship program that works for you.
  6. Look into credit counseling. A nonprofit credit counselor can help you chart a course for paying off your balances by going over your budget together, coming up with a plan and possibly negotiating with your creditors to set up a repayment plan and help you save money.

How to Avoid a Debt Cycle

Avoiding a debt cycle comes down to building financial stability. When you're on firm financial ground, you'll be more likely to manage anything life throws at you without relying on debt. Here are some boxes to check:

  • Stick with a budget. Pressure to spend is all around. To avoid spending beyond your means, create a clear plan for how much you'll put toward necessities, discretionary spending and building savings each month.
  • Track your spending. The easiest way to avoid overspending and ending up in debt is to start tracking your spending. Consider using a budgeting app that connects to your bank account to automatically import all your transactions. From there, check your spending daily or as often as necessary to ensure you aren't going over budget.
  • Create an emergency fund. A flush emergency savings account can help you cover yourself when times get tough, such as when you're hit with an urgent, large expense or if you experience a reduction in income. Having the money to cover yourself can help you make it through without borrowing.

The Bottom Line

Getting out of debt can be easier said than done, but the sooner you start, the less you'll pay in interest overall. Assessing your finances, cutting spending and making aggressive payments can help you break the debt cycle and start building financial stability.