How to Break Free From the Financial Debt Spiral

Last week, I wrote about three shocking facts as it relates to credit card debt in America. The three headline facts were as follows:

  1. Americans owe $1 Trillion in Total Credit Card Debt.
  2. Americans Paid $104 Billion in Credit Card Interest Last Year.
  3. The Average American Owes $6,375 in Credit Card Debt.

Clearly, many people have a problem with credit card debt. Chances are if you are reading this article, you may also have a credit card problem. Of the three “shocking credit card facts” listed above, the one that is most useful to me is #3 “the average american owes $6,375 in credit card debt”. I’m a fan of taking big numbers like $1 trillion in total credit card debt and turning them into a smaller, more reliable number, like $6,375 per person. $1 Trillion sounds like a great headline, but it’s such a big number that our human brains can’t even grapple with what it truly means. But $6,375 in credit card debt per person? We ALL can rationalize that number. Some of us may even be living that number.

The Debt Spiral

“you couldn’t meet your current spending obligations with your current income, so you borrowed money against a credit card to make up the difference”
Photo by Natalya Letunova on Unsplash

Why is $6,375 in credit card such a big deal? Putting aside the very real psychological impact that comes with high levels of debt. Credit card debt can often create a vicious cycle of needing to borrow more and more until you are financially enslaved to your debt.

If you have credit card debt, ask yourself why you borrowed that money from the credit card company in the first place? Whatever you spent the money on, the answer amounts to the same thing, “you could not meet your current spending obligations with your current income, so you borrowed money against a credit card to make up the difference”.

Unless you have found a way to spend a lot less or make a lot more money credit card debt exacerbates the problem. You already had to borrow money to meet your expenses, now you add to your credit card debt which increases your expenses. Say you are the average american and have $6,735 in credit card debt and you are paying 19% on that debt. That debt will cost you an extra $106 per month just to cover the interest, meaning you are not putting a dent in the principle.

So, if you borrowed money on your credit card because you could not meet your expenses with your current income and now you add $106 to your monthly expenses you are now more likely to need to continue to borrow to meet your monthly expenses, adding further to your total debt and monthly interest charges. Round and round you go down the financial death (debt) spiral.

Ending the Financial Debt Spiral

Be Prepared to make Sacrifices

Like most things in life, breaking the debt spiral is simple. It’s not easy, but it is simple. You need to reduce your expenses, increase your income and begin paying down the debt.

The first thing you will need to do is take a good hard look at ALL of your expenses. You should start tracking where your money is going, down to the penny. Start with all of your discretionary spending. How much money are you spending on eating out, fancy coffees, cigarettes, alcohol and other things that you could cut out of your budget immediately. If you are looking for some extra help tracking and reducing your expenses, the most popular spending app out there is Mint.

Do you have a car? If “yes”, ask yourself do I absolutely need this car? If the answer is “no”, then consider ditching it. Even a paid off car can be a money pit when you consider the maintenance, insurance, and gas; it adds up quick. If you are lucky enough to live in a city with solid public transit, ditching your car is a big opportunity to cut out a large monthly expense.

Now for the elephant in the room, your housing costs. Whether you rent or own, housing is the #1 cost for the average family and accounts for about 1/3 of all expenses. The first question to really ask yourself, am I paying for more house than I really need? If you are a family of 3 living in a 4–5 bedroom house and you have massive amounts of credit card debt, it may be time to downsize.

Not willing to downsize? First of all, please take a moment to reconsider… Still not willing to downsize? Consider looking into a house hacking arrangement to produce some income from your home. I’ve written about this topic in more detail here.


While we are on the topic of homes, if you own your home you may have a golden opportunity to scrap that credit card debt immediately. If you have enough equity in your home you may want to consider refinancing your mortgage to pay off your credit card debt. The math here is pretty simple, you still owe the money but rather than paying 19% interest you pay 4% (or whatever your new mortgage rate might be).

If you have really changed your financial ways and have a hold of your expenses, this could be a financial lifesaver to break the debt spiral quickly.

But, what if I don’t own my home or don’t have enough equity to refinance? You can still get what is called a “consolidation loan” to pay off the high-interest credit card debt. The interest rate on the loan will be higher than a mortgage rate, but as long as it is significantly lower than your credit card debt, it is a move you might want to consider. I’d recommend talking with a financial expert you trust before committing to anything.

Whether or not you are able to consolidate your credit card debt, you still have debt and still need to work towards paying it off.

Snowball Approach

The “snowball strategy” to debt repayment was made popular by Dave Ramsey. Here is how Dave explains the strategy:

Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.

So if you have multiple credit cards or loans, take the loan with the smallest balance and throw all your resources into paying off that small balance first. This gives you the feeling of having “a win”. You actually paid off a loan/credit card in full. This gives you the confidence to keep going and the belief that you can one day escape the debt spiral.

Avalanche Approach

While the snowball approach provides you with quick “wins” and gives you the confidence to keep paying off the debt, the avalanche approach might be more appropriate for those who simply want to follow the “cold hard numbers”. Here is how the avalanche approach works:

Step 1: List all of your debts from the lowest interest rate to the highest interest rate.
Step 2: Make minimum payments on all your debts except the debt with the highest interest rate.
Step 3: Pay as much as possible on your debt with the highest interest rate.
Step 4: Repeat until each debt is paid in full.

Over the long run, the avalanche approach will actually save you money. By getting rid of the highest rate of interest first, you will pay less overall interest by the time you have cleared all of your debts. If you have the discipline to “stick with it”, knowing it might be a long time before you get your first “win”, this might be the route for you.

No matter how you get rid of the debt, the most important thing is you develop the financial discipline to continue tracking where your money is going and make sure you keep the debt off for good!

For an Extended Discussion on Debt Repayment Strategies Checkout this Video

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions