What Is a Debt Spiral and How Do I Get Out?

Quick Answer

A debt spiral is when you continue to fall deeper and deeper into debt, despite staying current on your payments. It can happen when you have high-interest debt, or if you suddenly need to take on more debt or lose your income.

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A debt spiral occurs when the cost of your debt becomes increasingly difficult to manage. Once you're in a debt spiral, you might find yourself with ever-increasing balances despite making large monthly payments. Because most of your payments go toward interest, you may not make a big dent in your overall debt even if you don't borrow more. Or, you could find yourself taking out new loans to pay off your existing debts.

Recognizing the early warning signs of a debt spiral and taking steps to get out of it as quickly as possible are important for escaping before it's too late. Here's how.

How Does a Debt Spiral Begin?

A debt spiral can begin when you unexpectedly or knowingly take on more debt than you can afford to pay off. It can also happen if you have a manageable amount of debt but your income suddenly drops.

The spiral could begin because of:

  • Emergency expenses: A personal or medical emergency could force you to take on new debts that may be difficult to repay.
  • Lost income: Unexpectedly losing your job or another source of income can make it hard to repay your debts.
  • Overspending: Spending more than you can afford to repay with high-interest credit cards or loans could lead to large interest charges that are difficult to pay.

A debt spiral might be the end result of a domino effect of life events as well. For instance, you might take out a high-interest loan to fix your car. While repairs are being made, you can't make it to work and won't get paid for the week, or might lose their job altogether. Similarly, a medical emergency could mean taking on medical debts while also being out of work.

No matter what kicked off your debt spiral, it can be difficult to escape when you have high-rate debts. For example, if you have a $4,000 credit card balance with a 22% annual percentage rate (APR) and only make minimum payments, it could take over 21 years to pay off the card. And that assumes you're not using the card for any new purchases. Auto title and payday loans can have much higher APRs, as can certain installment loans and lines of credit for people who have poor credit scores.

The fees and interest payments can also quickly add up if you're managing multiple debts. But if you start falling behind and miss a payment, that could lead to additional fees and hurt your credit, which could make getting a new loan more challenging and expensive.

How to Get Out of a Debt Spiral

Getting out of a debt spiral can be more difficult the longer you're in it. Here are several steps you can take to get out as quickly as possible.

1. List Your Debts

Knowing where you're at can be an important first step. List out all your debts, along with their:

  • Balance
  • Interest rate
  • Monthly principal and interest payments
  • Due dates

You can use this overview to help determine which debts to focus on first. And, if you can't afford to pay all your bills, consider the consequences of different debts going unpaid.

2. Consider Different Repayment Strategies

There are different debt payoff strategies that you can try. For example, some people prefer the debt avalanche method, which involves focusing on the debt with the highest interest rate first and can lead to paying less interest overall.

Alternatively, the debt snowball method has you prioritize the debt with the lowest balance. Doing this allows you to cross debts off your list sooner, which can be encouraging and might make it easier to follow through with your plan.

3. Try to Free Up Money for Debt Payments

Paying off debts can free up money that you can then put toward the next debt on your list. But you may need to find extra funds to speed up the process.

As a temporary measure, you may want to look for ways to drastically cut your expenses and use the money to pay down debts. Or, try to find ways to make extra money that you can use for debt payments.

4. Look Into Refinancing or Consolidating Debt

Changing the terms of your debts could make it easier to pay them off. For example, you may be able to take out a personal loan and use the funds to pay off higher-rate credit card balances. By refinancing and consolidating credit card debt, you'll have fewer payments to manage and may accrue less interest each month. However, the strategy could backfire if you wind up using the credit cards and taking on credit card debt again.

You can also reach out to your creditors to see if they offer any hardship accommodations, particularly if you're struggling because of a temporary and specific incident. A lower interest rate or minimum payment could let you catch up on other debts and avoid a spiral.

5. Get Professional Advice

If you're unsure of what to do or feeling overwhelmed, there are professionals who may be able to help.

Contacting a credit counselor who works at an accredited nonprofit credit counseling agency could be a good option. They may be able to review your financial situation and offer personalized advice. For example, the counselor might help you create a realistic budget or set you up on a debt management plan to help you pay off credit cards and other unsecured debts. Or, they may determine that filing bankruptcy makes the most sense right now.

Some for-profit companies may advertise debt settlement—when a creditor agrees to settle your account for less than the full balance—as an option. But watch out for companies that try to charge you upfront fees or pressure you into going down that path. While some debt settlement companies can offer helpful guidance or assistance, others may be scams.

Monitor Your Credit to Better Understand Your Options

Having good credit can help you qualify for loans and credit cards with lower fees and interest rates. Improving your credit can also open up new opportunities. You can check your credit for free with Experian, and also use your Experian account to get matched with personalized offers based on your unique credit profile.