Being stuck in a bad debt cycle is never a good thing. The thing is, it can be hard to stay away from debt. Our society has put the use of credit in an important part of consumerism. The existence of credit scores and the importance of having one forces us to use credit. Of course, that means we need to use it wisely in order to have a good credit score.
While debt seems like an inevitable part of our society, it still poses a huge threat to the stability of your financial future. This is especially true if you are using it recklessly. According to reports, credit card debt is at an all-time high right now. It does not matter where you live in the country. Reports reveal that credit card debt is rising everywhere. And that can be dangerous. While Americans seem to have always had this type of debt, it has one of the highest interest rates. If you let the balance grow, that can quickly accumulate. You might end up struggling to pay everything off.
When you have a lot of debt to pay, that can compromise your monthly budget. The high interest of credit card debts can lead to high monthly payments. Instead of using your limited resources to pay for basic necessities, you are forced to pay for your debts. That can quickly trap you in a bad debt cycle.
What is a bad debt cycle?
It seems that a lot of Americans are stuck in a destructive debt cycle. Reports reveal that almost 7 out of 10 Americans believe that debt is necessary but they also admit that they prefer not to use it. This is a sad financial truth that some people have to face. Obviously, there is something wrong with how they are managing their finances. It is either a problem of overspending or earning too little. It is not surprising that this financial situation will land you in debt.
But what exactly does it mean to be trapped in a debt cycle that is quite destructive?
Being in a bad debt cycle means you are continually borrowing money because you need to make ends meet. Before you can pay it off, you are forced to borrow more because your income cannot cover your expenses and debt payments at the same time.
Once the interest and total balance have made your debt too significant, you end up with an insurmountable amount of debt in your hands. If you cannot do something about this, it can compromise your financial future.
Obviously, if you want to get out of a bad debt cycle, you need to change something about how you manage your finances. It depends on what is keeping you stuck in debt. If your income is limited, you need to live a frugal life so you can make extreme cuts to your spending. This will hopefully help your income cover all your expenses and even have extra for debt payments.
But if you are overspending, you need to make a commitment to change your spending habits. You have to make smarter financial choices so you will not be forced to borrow money and add to what you owe.
Use debt management to get out of a bad debt cycle
While you are changing your financial habits to get out of a bad debt cycle, you also need to do something about your existing debts.
If you are in a debt cycle, that simply means you are in a bad financial situation. You need professional help in the form of a debt management service. This involves a credit counselor who will assist you and provide their expertise, not just in paying off your debts, but also in helping you stay out of it.
There are three ways that this debt relief strategy can help you pay off your debts.
Educates you about what you did wrong
The first thing that a credit counselor will do is to analyze your current financial predicament. The primary goal is to understand your current financial situation to help them create a debt management plan. While they are analyzing your finances, they can also educate you on what you did wrong and how you can improve your financial management skills. This includes helping you create a budget and spending plan. With better skills in managing your finances, you can successfully avoid putting yourself in another bad debt cycle.
Creates a repayment plan
As mentioned, the credit counselor will help create a debt management plan that is customized based on your financial situation. Simply put, they will calculate how much you can comfortably afford to pay each month without putting too much strain on your budget. Also known as the DMP, this will help ensure that you can complete your debt payments. At the same time, it will force you to make sure that your spending will not compromise your debt relief efforts.
Of course, this has to be aligned with your budget plan. Make sure that it is marked as a priority so it will always have funds. You can ask the credit counselor to help you with this as well. By incorporating it in your budget, this will help cure your spending problem so you can avoid another bad debt cycle in your future.
Forces you to stop using credit
At least, this is true for the credit accounts that you enrolled in the debt management program. If the creditor or lender agrees to the debt management plan that the credit counselor will present to them, you will have to give up using the accounts. This will only be temporary. The creditors and lenders will allow the lower payments, maybe even a lower interest rate, as long as you do not add more to your debts. Since this is forced, it will definitely get you out of a bad debt cycle. Your debt will not have room to increase and will be paid off before you know it.