How to break the credit card debt cycle

While dealing with long-term credit card debt may never be ideal, now is an especially expensive time to carry a balance from one month to the next. This is mainly due to the surging interest rates that have impacted everything from mortgage payments to auto loans and credit card bills. Where credit card accounts assessed interest saw average rates as low as 16.04 percent in 2018, indebted consumers are now paying average rates of 20.92 percent as of March 2023, according to the Federal Reserve.

Unfortunately, there are few ways to escape crushing amounts of debt without paying it off — and taking steps to avoid making it even worse. At the end of the day, breaking the credit card debt cycle requires you to reinvent your relationship with money while learning to think about your debts and expenses in a whole new way.

Create a monthly budget or spending plan

In order to get out of debt and stay out, your first course of action should be creating a plan for where your money goes each month. For example, you can sit down to write out a monthly budget that shows your income and all your required and estimated expenses in any given month. You can also try budgeting with one of the best budgeting apps, which can make the process virtual and do some of the grunt work that comes with tracking expenses for you.

Either way, your monthly budget should:

• Set limits for discretionary spending categories like food and entertainment
• Create a plan for your debt payments each month that has you paying more than the minimum
• Leave some room for savings each month

Our guide to how to make a budget explains how you can get started using five simple steps, which include calculating your income, tracking your spending, setting your priorities, creating your spending plan and adjusting your budget as the months progress.

Stop using credit cards for purchases

In order to dig your way out of credit card debt, you have to stop digging! For the most part, this means not using credit cards for purchases while you focus on your debt repayment goals.

Instead of using credit cards, consider using debit cards or cash for all spending and bills until you’re debt-free. You may be able to use credit cards again in the future, but not using them now will make getting out of debt much easier and faster.

Consolidate debts you already have

While creating a monthly budget and halting the use of credit cards can go a long way toward helping you escape the credit card debt cycle, debt consolidation tools can also help in your journey. By consolidating debt, you get the chance to decrease the number of bills you pay each month and potentially even get a lower interest rate.

As an example, you can consolidate debt with a 0 percent APR credit card that lets you pay down debt with no interest for up to 21 months. If you choose this route, however, you’ll want to understand that variable interest rates apply thereafter. Also, balance transfer fees (usually 3 percent or 5 percent of the debt transferred) apply any time you transfer credit card debt from one card to another.

You can also consolidate debt with a personal loan that gives you a fixed interest rate, a fixed monthly payment and a set repayment period that you’ll agree to upfront. Since personal loan rates are lower (on average) than credit card interest rates, this strategy can help you simplify debt repayment with lower interest charges along the way.

Look for additional earning opportunities

Another way to break the credit card debt cycle involves earning more money — at least for a while. After all, bringing in more cash gives you more wiggle room to keep up with regular bills while paying down debt. If you boost your earnings a lot, you can even begin increasing your debt payments month after month.

How can you earn more money? There are many strategies to boost earnings, including picking up a side hustle, looking for a part-time job, asking for a raise or selling items around your house that you don’t really need.

Build up an emergency fund

Finally, remember that it’s hard to stay out of debt when you don’t have savings and any “surprise” or emergency expense automatically sends your finances into a tailspin. To get out of debt and stay out, you’ll want to slowly begin saving up at least three to six months of expenses in an emergency fund.

While that seems like a lot of money to save, you can start small by trying to save $500, then $1,000 then $3,000 or $5,000 over time. This should get easier as you pay down debt, and having that savings can help you avoid racking up new debts during the journey.

The bottom line

To break the credit card debt cycle you’re currently in, you’ll need to find a way to pay off the debts you have while avoiding new bills. The best way to do this involves creating a monthly budget, consolidating your debts to pay them off faster, building an emergency fund and not using credit cards for spending in the short-term.

You can do all of this on your own, but you certainly don’t have to. If these steps feel overwhelming and you know you need outside help, consider reaching out to a reputable nonprofit organization that offers debt relief solutions.