What is a debt spiral?

If your debt has reached unmanageable levels, you could be stuck in a debt spiral.

That’s the phrase used to describe a situation where you need to borrow money to pay off your existing debts. It’s a vicious cycle that can keep you from ever paying off what you owe, all whilst interest and fees continue to stack up.

There are things you can do to bring your debt under control and end the cycle, but they take time and effort. In this guide, we explain what a debt spiral is and how you can work your way towards a more stable financial situation.

What is a debt spiral?

A debt spiral or ‘spiral of debt’ is when you have no option but to borrow more money to pay off your existing debts. In some cases, you might end up repeatedly taking out further credit as it becomes increasingly harder to settle what you already owe.

There are lots of ways that you can fall into a cycle of debt, and it’s more common than you might think. A few missed credit card repayments, emergency spending that you can’t avoid, or even a sudden dip in your income could all put you at risk of getting sucked in.

How does a debt spiral begin?

Perhaps you’ve borrowed a small amount of money and for some reason find yourself unable to repay it. You might then take out a loan to pay off the first amount, but then struggle to repay that. It might even be that you then take out a credit card to settle your liabilities, only to find that you can’t afford the monthly payment amounts.

While all of this is happening, interest may be accumulating against your total debt figure. This can make it even harder to catch up with your growing liabilities, and leave you with no option but to keep borrowing money each time a repayment falls due.

You might also be in a debt spiral if you have to borrow money to pay for your essential living costs. This is especially true if your primary income is being used up on debt repayments, leaving you with no option but to take out more credit to pay your bills or for food and transport.

How to Break a Debt Spiral?

When you’re struggling to cope with debt, it can sometimes feel like there’s no way out. In truth, there are lots of things you can do to improve your situation, pay off your debts, and become more financially stable.

Here are some of the key steps that could help you to break out of a debt spiral:

1.     Assess the situation

The first step in escaping problem debt is to work out what sort of trouble you’re in. If you’re unable to make even the minimum repayments towards your loans and credit cards, you could be in a debt crisis.

It sounds serious – and it is – but you’re unlikely to be facing a debt crisis unless you really can’t meet the cost of your basic expenditure. Similarly, very large debts could mean that you’re facing serious financial problems, especially if they outstrip your yearly post-tax income.

If these issues sound familiar, it might be time to seek the help of a professional debt adviser or councillor. Alternatively, you could contact one of the below UK-based organisations who offer free and impartial financial advice:

• www.moneyhelper.org.uk
• www.stepchange.org
• www.nationaldebtline.org

2.     List your debts in full

All too often, people find themselves without a complete picture of their outstanding debts. This is problematic because it could prevent you from making repayment on time, and might even lead to you making less sensible financial decisions.

Making a list of all of your debts is the first step to take when dealing with a debt spiral. It’ll give you a better understanding of what you owe, and to whom. Crucially, it might even be the wake-up call you need to take control of your finances.

You should be sure to include every debt you have to ensure you have an accurate idea of what you owe. This might include loans, credit cards, overdrafts, car finance and hire purchase agreements, store cards, short term loans, and any other debts that you may have.

3.     Create a debt repayment strategy

Once you know exactly what you owe, you can start making plans to deal with your debt. It might be that you have some savings that can be used to pay down some of what you owe, or perhaps you can find ways to cut down on spending and put more money towards paying off your debts.

Either way, the important thing is to make a sensible plan and stick to it. Debt doesn’t go away without hard work and dedication to improving your situation, which is why it’s so important to create a strategy that you can commit to.

4.     Create an accurate budget

Every good debt strategy should include a comprehensive budget. This could help you to take back control of your finances, and start to understand the root cause of your money worries.

Many people get caught in a debt spiral because they never have a chance to build up any emergency savings. All of their income is spent on servicing their outstanding debts, and they live from paycheck to paycheck.

Creating a budget could reveal where your money’s going, and help you to stop spending quite so much. Make sure to include all income and expenditure so that nothing goes amiss. Even failing to account for the smallest cost could topple your budget, so by including everything you’ll be able to make sure that your spending doesn’t outstrip your income.

5.     Decrease your outgoings

It’s impossible to cut debt without paying more towards your loans, credit cards, and other outstanding liabilities. Armed with a comprehensive budget, you can start to look for ways to reduce your expenditure and put more money towards bringing your debts under control.

If you’ve heard the phrase ‘live within your means’, you’ll already understand why it’s so important not to overspend. When credit is so readily accessible, it’s easy to get used to a lifestyle that exceeds your income bracket. You’d be surprised by how much you can save simply by making smart swaps with your shopping and utility providers.

6.     Increase your income

If you can’t decrease your expenditure by enough, you may need to find ways to supplement your income.

There are lots of different ways to earn some extra money, and every extra penny counts when you’re trying to break out of a debt spiral. Perhaps you could do some overtime at work, take on a weekend role, or even start your own side hustle.

The important thing is to make sure that you can continue earning money while cutting your expenses – leaving extra cash left over to pay more towards your debts.

7.     Reach out for help

Some people find that their debt is too overwhelming to be dealt with by effective budgeting. In such cases, you may need to reach out for support to deal with your situation. The debt charities we mentioned earlier are just some of the organisations that provide support in these circumstances, but you can also get help from a financial adviser or debt counselling service.

If there’s no reasonable way for you to bring your debt under control, you may need to explore the alternative of a formal insolvency solution. Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) can all help you to deal with your debts in a structured way.

You may also wish to engage directly with your creditors to ask for help managing your debts. Lenders and other credit providers prefer to deal with proactive debtors who want to address their issues, and may even be able to assist by putting an affordable repayment plan or temporary payment reduction in place.

8.     Don’t get into any more debt

As you continue to pay off your existing debts, it’s important to avoid falling deeper into a spiral. It might seem easy enough to get approved for new credit cards and other forms of borrowing, but taking out extra liabilities could prevent you from escaping the cycle of debt.

Rather than finding new ways to spend money, it’s often better to focus your efforts on paying back what you owe already and avoid getting into further debt.

9.     Avoid impulse buying

When credit is so readily available, it can be very tempting to make purchases on a whim. The problem is, even a few impulse purchases can derail your attempts to improve your financial situation.

You may find it helpful to wait a while whenever you feel you need to make a non-essential purchase. Clothes, cars, electronics, and luxuries will all still be there in a few days or a week, and waiting before committing to purchase could give you the time needed to decide whether you really do need to spend money that could be put towards paying off your debts.

10.  Prioritise your debt

If you’re dealing with multiple debts, you can ahead of them by prioritising certain repayments. There are various ways to prioritise your debt, but the snowball and avalanche methods are among the most popular.

The debt snowball method involves paying off your smallest debts first to get them out of the way. You should continue to make the minimum repayment towards all of your debts, but pay as much as possible towards your smallest debt. Once that’s been settled, you can then start putting that amount towards your next smallest debt and so on. All of this means you’ll stay motivated as you pay off small debts quickly, slowly working towards becoming debt-free.

The debt avalanche method works in a similar way, but rather than putting as much money as possible towards your smallest debt, you prioritise paying the one with the highest interest rate. This can make it cheaper to pay off what you owe, and even accelerate the process of becoming debt-free. 

Both methods require dedication and self-control, but they can make a major difference to your financial situation.

Stay optimistic - You can end your debt spiral

Nobody wants to find themselves grappling with unmanageable levels of debt, but it can be difficult to deal with your liabilities when the costs just keep on coming.

The important thing to remember is that you can take control of your finances. Creating a budget, reducing your spending, and cutting out new forms of credit can help you to pay off what you owe and work your way towards a better financial situation. If you really can’t manage to deal with your debts alone, there’s help available from the debt charities listed earlier in this guide.

Debt spirals can be very difficult to deal with, but with the right strategy, you could deal with your debts and improve your financial position.