Trapped by Debt: How to Recognise When You're Entering a Debt Spiral?
Being trapped by debt is one of the most stressful things that can happen to a person. From demands for payment from creditors to calls from debt collection agencies, the pressure can be relentless and emotionally draining.
But the key is staying calm and focusing on working your way out of this situation. The first and best thing you can do is understand your situation and learn how to avoid it in the future.
The situation escalates as the debt accumulates due to interest rates and late fees. Eventually, it becomes impossible to continue making payments, which leads to them defaulting on their payments.
When that happens, creditors and debt collection agencies won’t be far behind.
While it may seem like a manageable strategy in the short term, this approach extends your debt repayment timeline and grows the total amount you'll eventually pay due to interest.
When you pay just the minimum, you only cover the accrued interest without significantly reducing the principal balance, meaning you're not climbing out of the debt pit.
Why is this problematic?
Over time, you'll find that a significant portion of your income goes toward servicing this growing debt, thus leaving you with little financial flexibility for savings, investments or anything else.
Take the scenario below, for example:
Suppose you have a $5,000 credit card balance at an 18% average annual percentage rate (APR).
If you make only the minimum payment of $100 per month, it will take you about 94 months (that’s nearly eight years!) to pay off the debt, and you'll end up paying over $4,300 in interest alone.
And that’s for only one credit card. What happens if you’ve got multiple credit card balances or loans that need to be serviced?
Besides that, it is also a clear sign that you are living beyond your means. When that happens, you end up in a vicious cycle of continuously using new credit to pay off old credit while letting the outstanding debt grow due to high-interest rates.
These habits can lead to a snowballing debt situation, especially when you consider the high interest rates associated with credit cards, which compound your debt at an alarming rate.
Relying on credit for daily expenses can create a false sense of financial security which may cause you to overlook the severity of your situation. At the same time, it can also result in reckless spending habits.
And over time, this behaviour can result in even higher levels of debt.
This type of financial avoidance is often a psychological response to an overwhelming debt burden, making the reality of your situation so daunting that facing it can feel impossible.
When that happens, a person believes that ignorance is bliss and chooses to not face up to what’s actually going on.
Key Indicators to Watch for:
Recognising and addressing financial avoidance is crucial. The longer you ignore the problem, the more insurmountable it becomes. Tackling it head-on may be emotionally challenging, but it's the first step toward breaking the cycle and regaining financial control.
At Collectius, we understand that each customer's situation is unique. Our methodology is consistently guided by respect, compassion, and a genuine understanding of individual needs - we call this "The Collectius Way of Collection".
If we have contacted you, don't worry; our friendly customer service representatives are ready to help you find a solution that works for your situation and financial capability.
Furthermore, we strictly adhere to all applicable governmental guidelines, reinforcing a basis of legal integrity and mutual trust in all our partnerships. This sets us apart in an industry that is often heavily scrutinised.
But the key is staying calm and focusing on working your way out of this situation. The first and best thing you can do is understand your situation and learn how to avoid it in the future.
What is a Debt Spiral?
A debt spiral is a situation where a person is increasingly unable to manage their debt. Initially, this may start with needing help making minimum payments on credit cards, loans, or other financial obligations.The situation escalates as the debt accumulates due to interest rates and late fees. Eventually, it becomes impossible to continue making payments, which leads to them defaulting on their payments.
When that happens, creditors and debt collection agencies won’t be far behind.
Signs that You're in a Debt Spiral
1. Making Only Minimum Payments
Making only the minimum payments on your credit cards or loans is a major red flag that could signal you're heading toward a debt spiral.While it may seem like a manageable strategy in the short term, this approach extends your debt repayment timeline and grows the total amount you'll eventually pay due to interest.
When you pay just the minimum, you only cover the accrued interest without significantly reducing the principal balance, meaning you're not climbing out of the debt pit.
Why is this problematic?
Over time, you'll find that a significant portion of your income goes toward servicing this growing debt, thus leaving you with little financial flexibility for savings, investments or anything else.
Take the scenario below, for example:
Suppose you have a $5,000 credit card balance at an 18% average annual percentage rate (APR).
If you make only the minimum payment of $100 per month, it will take you about 94 months (that’s nearly eight years!) to pay off the debt, and you'll end up paying over $4,300 in interest alone.
And that’s for only one credit card. What happens if you’ve got multiple credit card balances or loans that need to be serviced?
2. Relying on Credit Cover Routine Expenses
Using credit i.e. cards, BNPL schemes for everyday expenses like groceries and utility bills to cover cash shortfalls is another significant indicator of a debt spiral.Besides that, it is also a clear sign that you are living beyond your means. When that happens, you end up in a vicious cycle of continuously using new credit to pay off old credit while letting the outstanding debt grow due to high-interest rates.
These habits can lead to a snowballing debt situation, especially when you consider the high interest rates associated with credit cards, which compound your debt at an alarming rate.
Relying on credit for daily expenses can create a false sense of financial security which may cause you to overlook the severity of your situation. At the same time, it can also result in reckless spending habits.
And over time, this behaviour can result in even higher levels of debt.
3. Avoiding Financial Statements & Your Bank Account
Ignoring financial statements, unopened bills, and unheeded creditor calls is more than just a bad habit — it is a major warning sign that you may be getting yourself caught up in a debt spiral.This type of financial avoidance is often a psychological response to an overwhelming debt burden, making the reality of your situation so daunting that facing it can feel impossible.
When that happens, a person believes that ignorance is bliss and chooses to not face up to what’s actually going on.
Key Indicators to Watch for:
- Unopened Bills: Piles of unopened bills or unread emails from creditors strongly indicate that you're in denial about your financial state.
- Screening Calls: If you find yourself ignoring or screening calls from unknown numbers out of fear that they may be debt collectors, you're likely on the path to a debt spiral.
- Anxiety or Stress: Experiencing anxiety or stress at the mere thought of checking your bank account or credit card balance suggests that you're avoiding your financial reality.
Recognising and addressing financial avoidance is crucial. The longer you ignore the problem, the more insurmountable it becomes. Tackling it head-on may be emotionally challenging, but it's the first step toward breaking the cycle and regaining financial control.
At Collectius, we understand that each customer's situation is unique. Our methodology is consistently guided by respect, compassion, and a genuine understanding of individual needs - we call this "The Collectius Way of Collection".
If we have contacted you, don't worry; our friendly customer service representatives are ready to help you find a solution that works for your situation and financial capability.
Furthermore, we strictly adhere to all applicable governmental guidelines, reinforcing a basis of legal integrity and mutual trust in all our partnerships. This sets us apart in an industry that is often heavily scrutinised.