The Debt Cycle: What Is It and How Can You Break Free?

By November 21, 2022 Uncategorized
Couple struggling with bills

Debt enables us to earn college degrees, lease cars, and obtain mortgages. 

While borrowing is necessary, accumulating excessive debt can strain your financial freedom.
That’s where debt can turn dangerous. 

Over time, debts pile up and create a cycle that seems impossible to overcome.

In this article, we’ll introduce the core components of a “debt cycle,” explore the telltale signs that indicate a debt cycle is coming, and reveal five powerful ways to get your debts under control.

What Is a Debt Cycle?

A debt cycle occurs when a borrower repeatedly takes on more debt than they can confidently repay. 

While individual debts—like credit card bills—are quite common, a debt cycle is a state of continual borrowing (i.e., a sum of individual debts) that dramatically increases interest costs and eventually leads to default.

This process can happen in a hurry. 

For example, let’s imagine someone is planning to buy a new house—let’s call her Marta. While Marta already has student loans to repay, she elects to obtain a mortgage so she can move into her dream home. Now, Marta must pay her student loans and her mortgage every month. It’s daunting, but for now, it seems doable. A few months later, however, Marta accepts a job an hour from home and needs to buy a car for the commute. Marta will now be expected to make student loan payments, mortgage payments, and auto loan payments on top of her living expenses—like groceries, utilities, and credit card bills. Before long, Marta’s monthly debts dramatically exceed her monthly earnings, forcing her to obtain additional loans to cover her required minimum payments.

Whenever loans are used to cover other debts, a debt spiral is firmly underway.  

Signs of a Debt Cycle 

Here’s some good news: a debt cycle can often be predicted

In fact, there are three reliable ways to tell if a debt cycle is threatening your finances.

1. You’re Living Paycheck to Paycheck

At first glance, living paycheck to paycheck may seem rather harmless.

Besides, over 63% of Americans spend everything they earn—including over 50% of six-figure earners.

However, living paycheck to paycheck can be jeopardized by just one unforeseen event,  like job loss or personal injury.

Any emergency situation could require you to borrow additional loans and initiate the first step in a debt cycle.

After all, living paycheck to paycheck means you have no margin for error.

2. Your Debt-to-Income Ratio Is Over 50%

When lenders assess a borrower’s financial profile, they often evaluate their debt-to-income ratio (i.e., DTI).

This common formula assesses your total monthly debt payments against your gross monthly income.

For example, let’s say you pay roughly $2,000 a month for your mortgage, $100 a month for your auto loan, and $900 a month for your credit cards. Overall, your total monthly debt payment would be $3,000. If your gross monthly income were $5,000, your DTI would be 60% (as $3,000 is 60% of $5,000). A 60% DTI is considered to be very high. In fact, many banks and financial experts advise borrowers to maintain a debt-to-income ratio below 35%. Once that figure climbs above 50%, your borrowing options will be limited, and you may already be on the road to a significant debt cycle.

3. You’re Struggling to Save

Whenever saving seems impossible, a debt cycle may be looming.

Generally speaking, an inability to save suggests that your monthly expenses are too high.

On the other hand, if you’re able to consistently save or invest every month, you can have confidence that your financial habits are in good shape.

As we’ll discuss below, budgeting is the true secret to saving.

How to Get Out of a Debt Cycle

In modern America, debt is a part of life—for people born within the US and immigrants alike. 

If you’re in debt, you’re not alone. In fact, by the end of 2021, the total average consumer debt balance was $96,371.

Wherever you are in your financial journey, consider these five quick tips for getting out of debt:

1. Review Your Finances

Like your regular physical at your doctor’s office, it’s important to conduct a detailed audit of your financial life. 

Set aside some time to review your spending habits, including your:

  • Largest monthly expenses.
  • Quarterly and annual payments. 
  • Credit and debit card statements.

Once you’re familiar with your spending habits, you’ll be able to make truly meaningful changes. 

2. Revise Your Spending Plan

Budgeting is essential to avoiding the dangers of a debt cycle

To that end, look for opportunities to focus spending solely on your needs rather than your wants. In other words, prioritize things like food and rent over entertainment and travel—at least in the short term. 

As you adapt to a more restrained method of budgeting, you will identify new opportunities to reduce discretionary spending until the debt cycle is no longer a threat.

While these changes may be challenging to follow at first, they’ll reap rewards for years to come

Note: The 50/30/20 rule could really help revolutionize your budget.

3.  Put Your Credit Cards Away

While credit cards can be convenient (and rewarding), they can also make it exceptionally easy to initiate a debt spiral

After all, paying the minimum on a high-interest card is a recipe for financial trouble. 

For the time being, consider putting your credit cards away in favor of cash (or a prepaid debit card)

This will help put you back in the driver’s seat of your spending and protect you from the dangers of credit. 

4. Add a Part-time Job

The gig economy makes it easier than ever to make some extra cash. 

While reducing your spending, you can increase your earnings by picking up work through freelance websites, side hustles, and more. 

To make the most of your time and talent, click here to learn more about some great part-time jobs for immigrants.  

5. Create a Debt Repayment Plan

When it comes to paying down debt, there are no quick fixes. There’s only the plan you make and your ability to stick with it. 

Because it’s a marathon and not a sprint, you’ll want to choose a debt-eradicating strategy that entices you the most. 


For example, there’s the Dave Ramsey Snowball Method, which promotes the philosophy of paying down your smallest debts first (like credit card bills) and working your way up to larger items, like your mortgage. 

Over time, you’ll dismantle increasingly large debts until you break even.

Conversely, there’s the Debt Avalanche method, which advises consumers to target debts with the highest interest rates first (and thereby decrease the total debt load faster).

In other words, you would aim to pay off your big-ticket items (like your mortgage or student loans) before going for anything else.

Mathematically, the Debt Avalanche approach will save you the most money in the long run. Though you may not see the results at first, be sure to stick to your plan, and the wins will come

Breaking a Debt Cycle? uLink Is Here To Support You

The journey to becoming debt-free takes time.

Start by identifying whether you might be falling into a debt cycle. Then, plan accordingly, be forgiving of yourself along the way, and most importantly, be patient.

At uLink, we’re with you every step of the way. 

While you secure your financial freedom, we’re dedicated to helping you support your family. That’s why we provide great exchange rates, fees starting as low as $0, and service that’s fast, reliable, and secure.

Miles from home—just moments away with uLink.