KEY TAKEAWAYS:

✔ The cycle of credit card debt occurs when you only manage to pay the interest on your credit card while never reducing the balance you owe.

✔ By changing your money mindset and creating some spending rules, you can break the cycle.

✔ Understanding your spending habits and shifting your focus to paying off debt are the first steps to becoming credit card debt-free.

If you dread looking at your credit card balance every month and feel like no matter how much you put towards the balance, it never seems to go down, you’re not alone. According to the Bank of Canada, roughly half of Canadian credit card users pay only a portion of their balance and carry over the remaining debt to the next month.[i]
 
If you’re caught in this never-ending loop called the “cycle of credit card debt,” read on to discover the way out.

How the cycle starts

The cycle of credit card debt happens when you spend more on your card than you’re able to repay. As you chip away at the balance, you get charged high interest on the money outstanding, leading to more debt. Eventually, your monthly payment is just covering the cost of interest, and you’re caught in a cycle where the balance never goes down.

How to break the cycle

1. Understand what it’s costing you

Your old credit card statements are full of clues showing you where your money went and how those charges caused your balance to creep up. Take a look at those statements and ask yourself:

How many charges are wants instead of needs? 

Highlight the purchases on your last credit card statement that are “wants” – things that you felt were ‘nice to have’ but not essential. Become mindful of how these unnecessary purchases can eat into your budget and sabotage you from paying down your debt. 

What interest rate am I paying? 

High-interest credit cards range from 19-25%. These higher rates can make it a challenge to pay off your balance every month. Try switching to a card with a lower rate. Most banks offer simple, low-interest cards and allow you to easily transfer your balance.

2. Change your spending 

It takes time for a credit card balance to grow beyond what you can afford to repay, and it’s unrealistic to think that you can pay it off right away. You’ll need to make some big changes, starting with:

Budget only for needs

Create a budget that cuts out all unnecessary spending. Only include essentials like rent, food, and utilities. All money left over goes straight towards your outstanding credit card balance.

Use cash or debit instead

When people use credit cards, they are more likely to buy something at a higher price, leave larger tips, and make impulse purchases.[ii] You’re more likely to stick to your budget if you only work with the money you have.

3. Focus on paying off your balance

Pay off high-interest debt first. Focusing your energy on your highest-interest debt is known as the “avalanche” approach, and it’s one of three common ways to become debt-free. 

Make more than the minimum payment

Once you identify ways to save money within your budget, use the extra cash to pay down debt and break the credit card debt cycle. This chart shows how much time and money you can save simply by paying more than the minimum every month.
 

4. Create a new, good habit 

Good money habits are things you do every day to manage your spending, like setting up regular monthly transfers from your account to your credit card. Here are three more ways you can build a better money habit.

Freeze your credit limit 

Did you know that you can ask your bank to lower the amount of available credit on your card? Having a lower credit limit can help you avoid overspending.

Keep track of your spending

To help you stick to your budget, you should regularly monitor how much you spend. There are lots of online budgeting apps that can help you manage and track your spending. 

Make some rules and stick to them

Live by a few simple rules, like never buying anything unless you have the money to pay it off. Or, make a point of not going to stores that will inevitably tempt you to buy things you might not need.

The help you need to get started

If the cycle of credit card debt seems never-ending and you’re struggling with it on top of other expenses, you may want to consider a debt consolidation loan. It allows you to pay off debt with a set monthly payment and terms that fit your budget. To understand if it’s the right time to consolidate your debt, call 1-888-502-3279 to discuss how you can break the cycle of credit card debt for good.

Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter. 

[i] Jia Qi Xiao. July 2024. The reliance of Canadians on credit card debt as a predictor of financial stress. Bank of Canada. Staff Analytical Note 2024-18 (English). Source.
[ii] Drazen Prelec and Sachin Banker. June 9, 2021. MIT Sloan. How credit cards activate the reward center of our brains and drive spending. Source.