Become Free of Debt: What is the Debt Cycle?
There is no singular definition of the debt cycle. Those who work in the debt management industry or work with those in credit difficulties emphasis different elements. However, the following are common issues of the so called debt cycle:
- Reducing Income – Over time an individual’s income will in effect be reduced. This takes place from the very first time a person takes out a form of credit. As interest is charged, a proportion of the person’s income is then used to service the debt.
- Revolving Debt – Revolving debt or reoccurring sources of debt are also a common feature of the debt cycle. Here an individual may take out, for instance a payday loan to pay for a short term dip in income or a rise in expenditure. When cobra payday arrives, the individual pays back the loan; however, the extra expense means that the person now has to borrow from the same source to fund the shortfall.
- Borrowing to Pay Creditors – This may be seen as one of the worst stages of the debt cycle. Here an individual has begun to borrow money, not to buy additional goods and services, but simply to pay back other creditors. At this stage it should be recognised that a serious problem exists and professional help may be needed.
Become Debt-Free: Breaking the Debt Cycle
As has been seen, the debt cycle may be seen as a downward spiral of increasing debts and a reducing value of income. To break the debt cycle, an individual must make lifestyle changes which see that see a reduction in out goings, the maximisation of income and the paying down of debt.
In order to break the debt cycle the following strategies may be considered:
- Debt Restructuring – In order to minimise payments, consider restructuring debt so as to reduce interest payments. This may include a variety of techniques from simply moving credit card balances to the cards with the lowest interest rates to refinancing expensive forms of unsecured personal loans.
- Negotiate with Creditors – Whether going it alone or using an intermediary, negotiating with creditors can yield some key benefits. Through negotiation it may be possible to gain reduced rates, the cancellation of penalties and even the partial write off of some debts in some cases.
- Paying Back Debt – Whilst paying down debt is never any fun, ultimately the only way to break the debt cycle is to focus on a strategy of paying back debt. Start by paying back debts that charge the highest rate of interest first; over time the amount of money needed to service interest charges will begin to reduce, thus speeding up the process of becoming debt-free.
In summary, the debt cycle may be seen as a cycle in which, ever increasing amounts of income are used to pay back debts. This can often result in an individual accruing further debts to service existing loans and other forms of credit. Breaking the debt cycle can mean difficult lifestyle changes however, the results are that over a prolonged period debt can be reduced at an increasing rate and an individual can become debt-free.