How to Break the Debt Cycle

Shattering the Cycle of Debt: A Comprehensive Guide

In an era of escalating interest rates and inflation, more people are finding it increasingly challenging to lessen their financial liabilities. If you’re persistently making payments towards your debt, but your balances remain the same or are growing, you could be trapped in a vicious debt cycle.

Luckily, there are actionable steps that you can employ to shatter the debt cycle and free up your resources for things that matter most to you. This article will delve into the reasons why you might be caught in a debt cycle, the strategies to escape from it, and where to seek assistance if your debt burden becomes unbearable.

Unraveling the Debt Cycle

Every individual’s circumstances are different. However, there are common factors that can trap you in a perpetual cycle of debt. These often include inflation, high-interest rates, credit card debt, high-interest loans, income taxes, and job loss among others.

The Impact of Inflation

The cost of living in Canada has seen a significant surge in the past two years. In November 2022, the annual inflation rate was reported to be 6.8%. Conversely, the national base wage increase is projected to be only 4.2% in 2023. With wages not matching the rising cost of living, many Canadians are resorting to credit to meet their basic living expenses.

The Burden of High-Interest Rates

The Bank of Canada hiked interest rates seven times in 2022 to curb inflation. These rate increases are passed on to consumers by lenders who raise borrowing rates. Consequently, if you have a variable-rate mortgage, loan, or line of credit, you’ll find your interest rates and minimum monthly payments have significantly risen in 2022.

The Trap of Credit Card Debt

If you’re using your credit card to cover basic necessities like groceries and gas, you are not alone. The average Canadian household spends about $2,447 each month on their credit cards, a 21.8% increase from the same period in 2021. This increase can be attributed to the pent-up demand from the pandemic and the growing cost of living.

Meanwhile, if you’re only making the minimum monthly credit card payments, your balance may not decrease. In fact, if you’re still using your credit card, your balance might even increase despite making payments. This is because most of your payment goes into paying the interest on your outstanding balance, which can be quite high for credit cards.

The Dilemma of High-Interest Loans

Loan rates are higher now due to the Bank of Canada’s rate hikes. If you’ve recently taken a new loan, you’ll find that a significant portion of your payment is going towards interest. Higher interest rates translate to higher payments, leaving you with less money for other necessities.

Alternative lenders offer loans like payday loans at steep interest rates. If you have taken a payday loan or a loan from an alternative lender, you could find yourself in a debt cycle as the high-interest rates make these loans difficult to pay off.

The Challenge of Income Taxes

As an employee, your employer deducts income taxes and submits them to the Canada Revenue Agency on your behalf. However, if inadequate amounts are deducted, you might end up owing income taxes for the year. This often happens if you have more than one job or if you withdraw some Registered Retirement Savings Plan (RRSP) funds to cover bills, typically leading to tax debt.

Furthermore, being self-employed means you are responsible for paying your own income tax. Without careful planning, you could end up with a sizable tax bill at the end of the year.

The Canada Revenue Agency imposes penalties for late filings and interest on amounts due. Therefore, unpaid income taxes can quickly become a significant financial burden.

The Aftermath of Job Loss

Losing your job can necessitate the use of credit. There’s often a delay before receiving government support or finding a new job, during which expenses can quickly pile up. If you rely on credit to bridge the gap in your income, your debts can escalate rapidly.

Improving your financial literacy can help you break the cycle of debt. This podcast offers strategies to enhance your understanding of finances.

How to Break the Debt Cycle

There are several steps you can take to help break the debt cycle.

1. Review Your Personal Finances

Gather your bank account statements for the past few months, credit card statements, and other debt documents such as loans, leases, and mortgages. Calculate your income, the total amount you owe, your monthly payments, the interest you’re paying, and your rates.

Assess your personal expenses for utilities, housing, groceries, transportation, and personal care. The amounts you spend in these categories will help you set a reasonable budget for your future expenses.

2. Track Your Spending

Maintaining a record of your spending provides an accurate depiction of how your expenses compare to your budget. You can use a budgeting app, spreadsheet, or manually track your spending. A realistic view of your expenses can:


  • Help you adjust your budget to accurately reflect your spending habits.
  • Highlight areas where you can reduce expenses.
  • Show you if you have extra money that you can allocate towards debt repayment.


3. Choose a Strategy to Break the Debt Cycle

Evaluate your finances to see if there are ways to:



Contact Us

The economic conditions are challenging, and despite your efforts, you might find that nothing seems to work. However, help is available if you want solutions to manage your debts. The sooner you reach out, the more debt relief options will be available to you.

Please get in touch with Bankruptcy Canada for a free, confidential consultation with a Licensed Insolvency Trustee. We offer advice and debt solutions that can help you regain control of your finances and make a fresh start.

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