Ever been in so much debt, that the money you pay towards it is barely covering the interest? Think of a big forest fire, where emergency crew are barely able to put off one section, only for a new bigger piece of land to be taken over by fire, and it seems like you can never put it off, until you get more resources, or the weather somehow helps. In other words, even with big forest fires, there is the potential where nature could help, but no such thing exists to aid you in paying off your credit card debt.
The situation described above, where you are unable to make progress in paying off a credit card because most of your payments go towards interest, is commonly referred to as being trapped in a “debt cycle” . Another term you may have heard is “interest treadmill.” It can be a frustrating and challenging situation as the debt continues to accumulate, making it difficult to reduce the principal balance and make significant progress towards eliminating the debt. Here are some proven ways that can help you get out of this frustrating position:
- Increase Payments: This would be one of the easiest and most obvious ways. First, look at how much interest is being charged each month and adjust and increase your payments accordingly. By making larger payments, you can tackle the principal balance more effectively, reducing the amount of interest accrued over time. In other words, you are trying to get ahead of interest, even if it is by a slight amount . For example, let us say your monthly interest is $500, and you are paying $600, meaning you are ahead by $100 per month. Yes, that is not nearly enough to pay off a big chunk in a short time, but it is a good start.
- Prioritize High-Interest Debt: If you have multiple credit cards or loans, focus on paying off the one with the highest interest rate first while making minimum payments on the others. Once the high-interest debt is cleared, shift your focus to the next one, thus taking advantage of the popular snowball approach.
- Consider Balance Transfer: Explore the option of transferring your credit card balance to another card with a lower interest rate or even a promotional 0% interest rate for a specific period. This can help reduce the amount of interest paid, allowing more of your payments to go towards the principal. For example, if you are paying $500 a month in interest, and you get a promotion of 0% interest for 6 month, then that would be $3k saved in interest, which would then go directly towards covering the principle.
- Combination of adjusting Spending Habits and Income Increase: Take a closer look at your spending habits and identify areas where you can cut back or eliminate unnecessary expenditures. For example, do you have too many subscriptions? Redirecting those savings towards debt repayment can accelerate your progress and give you much needed confidence. You can also explore ways to increase your income, such as taking on a side gig, freelancing, or asking for a raise at your current job. But be sure to dedicate almost every extra cent you get towards the elimination of your debt. Be ruthless with it and don’t give it any chance to grow further.
- Seek Professional Help: Finally, if things are not improving and debt becomes overwhelming and you’re struggling to make progress, consider reaching out to a credit counseling agency or a financial advisor. They can provide guidance on debt management strategies, negotiate with creditors on your behalf, and help create a feasible repayment plan. But again, this should be your last resort and that is why we put it last!
Remember, overcoming this situation requires patience, discipline, and a full commitment to managing your finances effectively. It may take time, but with consistent effort and a solid plan, you can break free from the interest trap and regain control of your financial well-being. And when you do, it will be one of your best achievements ever and the feeling will be amazing.