How to pay off your debt and escape the debt trap
No one likes talking about money, especially debt. However, there is a problem plaguing many Americans today. It is called a debt trap. We are not talking about a nation’s finances. We are talking about personal debt. Over 12 million Americans get a payday loan each year, and millions more have credit card debt. In fact, the average American family is $5,700 in debt! Many people are struggling with debt right now. It is important to talk about personal finances. Today we will look a payday loans, credit cards, and paying off debt.
Borrowing money can be our best friend and our worst enemy. Of course, there are pros and cons to borrowing money. Having some debt can improve our credit score, thus offering access to better types of debt. Having too much debt can hurt our credit score, thus lowering our access to credit.
What is a debt trap?
A debt trap happens when a person continuously borrows money, thus increasing the amount of debt they owe. A lot of times, the borrower may only pay off debt, just to borrow more. Debt traps are common, but very hard to break. They can happen a few ways. The common denominator is that the borrower racks up so much debt, they do not know how to pay it. It can be stressful, and it can feel hopeless.
Credit card debt is a very common way to fall into the debt trap. Usually, people fall into the debt by racking up their credit card debt, and only paying the minimum. The credit card company might not seem upset or warn you that there is an issue if you only pay the minimum. So long as you pay the minimum on-time, your account will not be sent to collections. Meanwhile, your account could be racking up thousands of dollars of debt, and hundreds of dollars in interest. Credit card debt rises fast.
Depending on how people use payday loans, they may fall into a debt trap. Sometimes people go from payday lender to payday lender. Each time they borrow money to pay off their last loan. This type of activity can snowball into a bigger debt issue. Each time they take out another loan to pay a previous loan, they end up owing more.
Debt traps are hard to break. This is often because the person relies on debt for their daily expenses. It is hard for them to use their money to simultaneously cover their current expenses while also paying down debt. Debt traps can seem easy to manage at first. Unfortunately though, many people realize there is an issue once it is already too late.
Paying off debt – real stories
We have real people working at Net Pay Advance. Our team cares about you and your family. Below are two stories from Net Pay Advance team members. Both individuals have experienced the debt trap firsthand. They have either gotten out of the debt trap or are currently working on it. Here are their stories.
Jamie experienced credit card debt early in life. She was able to pay it all off and live debt free for a few years. Unfortunately, Jamie has since gone back into credit card debt. She is now working to pay it off all the way. This is Jamie’s story.
The majority of my debt that I felt was ‘unmanageable’ came from credit cards. I have always been financially responsible when it came to paying my bills on time, even my credit card payments. My credit score has always been good, I have never had delinquencies.
I moved out when I was 18. I was living independently, and it was going well. About a year or two later, I had the bright idea to get a credit card. I do not think I needed the card for anything specific. I just wanted it. I used the card on the silliest things. I used it to go shopping, hang out with friends, and more. I maxed it out quickly. I got another card, and another card. I kept making minimum payments on-time. The credit card company kept raising my limits. Of course, I kept hitting those limits.
“At one point I remember having most of my paycheck go towards bills. It was bad.”
Outside of my credit cards, I also had student loans. The student loan payments were small. But they were taking a toll on my paycheck when combined with my credit card payments. At one point I remember having most of my paycheck go towards bills. It was bad.
I realized there was a problem when I paid all my bills one day and only had $100 left until my next paycheck. I was angry with myself for getting into this position. I was sad because I worked so hard all week, only to have my money go to bills. It occurred to me how much money I would have if I did not have credit card payments. I felt hopeless; but more than that, I felt embarrassed.
I told my mom a little bit about my problem, but not much. I was an adult at this point. I did not want to admit the issue to my mother. She recommended I talk to my credit union about consolidating the loan. We thought it was a good idea since I had been with the same credit union for years. Plus, my car loan was also with them. I had a good relationship with the company. I talked with my credit union, and they offered me a low interest loan to pay off all my credit cards. Instead of multiple bills, I would just make one payment to them instead. I decided to work with my credit union, instead of a credit counselor. The interest rate was much lower with my credit union.
“Even though I was 25, the loan officer started reading off the balances on my cards out loud where my mother could hear!… I was mortified.”
I went back to the bank to sign my loan documents. My mother was with me. Even though I was 25, the loan officer started reading off the balances on my cards out loud where my mother could hear! My mother was shocked. I was mortified.
My mom and I talked more about the loan. Fortunately, she was understanding and felt my pain, but she knew I would work myself out of this mess. She saw it as a hard lesson learned.
I worked hard to pay off the consolidation loan. It took about 5 years to pay. Pretty soon afterwards, I paid off my car too. It was the greatest feeling ever! I did not owe money and I owned my own car! I lived life credit card debt free for a couple years. It did not last forever though.
A few years later, I slowly started racking up credit card debt again. It started with items that I needed but could not afford in cash. I used my credit card to get a washer and dryer. Then, I got a lawn mower. When my refrigerator went out, I had to buy a new one. I had a child and had to go to court for custody. Lawyers are not cheap. I used my credit card for the legal fees. At some point, I started using my cards on things I did not need, again. The next thing I knew, I was about $18,000 in credit card debt! Life happens fast sometimes.
I had been managing my debt better than last time. I was making more than minimum payments and paying extra here and there. No matter how much I paid though, it never felt like the balance was going down fast enough. I felt like I had no direction and that I would never be able to pay off the mountain of debt. Even if I were able to pay it all off, I knew it would take a long time. I felt hopeless again. I tried budgeting. I read books, used apps, and even tried programs, but nothing seemed to work for me. The most I could do was pay what I could here and there, and hope for the best.
“It made so much sense! Instead of budgeting each month out, she budgeted each paycheck.”
I told my mom about my situation, and she recommended The Budget Mom. I was skeptical at first, but I watched some of her YouTube videos when I was bored one day. She talked about how she followed a paycheck budget method. It made so much sense! Instead of budgeting each month out, she budgeted each paycheck. My struggle with budgeting was that most things told me to plan my budget out per month. That was difficult for me, because with a biweekly paycheck schedule, I never had the same amount each month. The paycheck budget method made so much more sense for me!
For Christmas last year, my mother got me The Budget Mom’s paycheck workbook. It sounds nerdy, but it was probably my favorite gift. I have been using it since then, and my debt has been going down so much faster. Best of all, I am also able to save up money at the same time. Most budgeting programs focus on paying off debt now and saving later. This plan lets me do both simultaneously. I am working on an emergency savings plan. The whole process has been an eye opener. I can see my debt going down, and I have a path that allows me to see an end to my debt issues. It feels great.
Everyone has different experiences with debt. I think for me, the hardest part was the second time I went into debt. It was difficult because it was mostly caused by things I needed. Life happened, and those big-ticket items knocked me back down and put me further in debt. Training myself to say, “I don’t need to make this purchase right now; I can put that money towards debt,” is another obstacle I am facing. I am proud to admit I am slowly getting better. I keep having to remember to not be too hard on myself when I make mistakes or overspend in a category.
My biggest advice for others would be to stay away from credit cards. They make it really tempting to spend money. It is even worse if you are younger and a partier, like I was. My other advice would be to pay your bills on time. A lot of people mess up their credit when they are young. My on-time payments led to a good credit score. That score allowed me to get a low interest loan. That strong payment history helped a lot. Try working on your credit score if possible.
I am still in the process of paying off my debt this second time. I still use The Budget Mom’s paycheck workbook. Some days I love it, and some days it feels tedious, but I still push forward. My son is 3, and my goal is to be credit card debt free by the time he starts school. Right now, I am on track to accomplish that goal before then. Yay!
Paige is another team member at Net Pay Advance. Paige also struggled with credit card debt at one point. When she realized she could not cover her regular expenses and make credit card payments, she realized she needed to make a change. Paige was able to pay off her credit card debt over the course of a few years. Since then, she has been living more comfortably. This is her repayment story.
I honestly believe that credit cards are the devil. You start with a small, manageable balance. If you make consistent on-time payments, your credit card company rewards you by increasing your credit allowance pretty substantially. It seems great at first. But if you have a lack of self-control, your credit card balance can quickly become too much to manage. That is what happened to me. I found myself in a position where I was unable to pay more than the minimum each month. I was only able to pay off the interest. I did not have enough to bring down the balance at all. The debt quickly added up each month.
I realize that there is good debt. Things like student loans and mortgages are good debt. They are good because you are investing in yourself. Credit card debt from frivolous spending is not an investment. You do not walk away with something good like a home or an education. You are just left with payments.
“Most months I was fine. However, any time I encountered an unexpected expense, it complicated my finances. I could not cover an unexpected expense, my other bills, and my credit card payments.”
For about a year, I had just been making minimum payments. Then, I started to fall behind on some other bills. Most months I was fine. However, any time I encountered an unexpected expense, it complicated my finances. I could not cover an unexpected expense, my other bills, and my credit card payments. My credit card bills always took a backseat to my other expenses. Paying my mortgage, car payment, and insurance was always more important. That is not good practice, but sometimes you just have to do what you have to do. I knew that falling behind on my mortgage or auto loan would demolish my credit score. I also knew that I needed to keep my house and get to and from work. I would make it work while living paycheck to paycheck.
I do not think there was an exact moment I realized there was an issue. At some point though, I realized I would not be able to pay off my credit card debt any time soon. I realized if I just kept paying the minimum, I would never be able to pay off the debt. I have always been a goal setter. I knew I would not be able to reach my three-, five-, or ten-year goals with this debt hanging over my head.
I started my journey by talking to a friend who was also in a similar situation. Knowing that I was not alone helped. She talked about how she had worked with a credit agency to consolidate all of her balances. Credit card consolidation agencies work with your credit card company to negotiate a repayment plan. They might be able to reduce the interest rate or remove some fees. Instead of paying your credit card company, you pay the credit consolidation agency instead. They help consolidate your debt so that you can pay down multiple cards at the same time.
I took my friend’s advice and called the credit agency she recommended. I wanted to learn more and start a plan with them. This particular agency charged a flat monthly fee of $5 for their services. I signed up and immediately cut up my credit cards so I would not be tempted to use them.
The hardest part was just making the decision to buckle down and make a change. Working with the credit consolidation company really helped though. Once I decided I wanted to move forward, I committed myself to the five-year plan. I set up auto payments so that I did not have to think about it. If I had extra money at the end of each month, I would pay off even more.
I had goals of buying a new house and car within the next five years. Being able to provide myself a great life is important to me. I would rather do that than wait for someone to give me things or provide for me. I knew the only way I could achieve my goals was to get out from this debt. If I ever wanted to travel, or enjoy nice things without putting everything on credit, I had to do this. I had to repay the years of poor money management first.
“Not having debts hanging over your head feels so liberating!”
The easiest part came after the first year or so. Once you are used to the payment coming out, and you see balances go down, it is so much easier to stay motivated. You can see the fruits of your labor taking shape. I used to have an endorphin rush when I went shopping because I loved new things. As time went on, I had that same rush when I saw my debt decrease. Not having debts hanging over your head feels so liberating!
My advice for others would be to stay away from credit cards. I am serious about this. Instead of getting a credit card, try to put money away into a savings account each month. If you do have an unexpected expense arise, or you want to splurge on something, you can. You can use the funds to cover the entire expense without putting it on a card. If you must have a credit card, never let the balance get higher than an amount you can pay off in one or two months.
If you have found yourself trapped in a pile of credit card debt, do not hide from your payments. I was in complete denial for months. I was scared, and it was easy to ignore. During that time though, it did a ton of damage to my credit score. When I finally faced the music and sought out help, it was not as scary as I had worked it up to be. I was able to get assistance and get out of debt.
It took a few years, but I have finally paid off all the debt! I actually finished my plan eight months ahead of schedule! Getting rid of the credit card debt felt like having a weight lifted off of me. I got rid of a large monthly expense. I have more financial freedom now. I can spend the money I have how I want. It is a great feeling!
As we mentioned at the start, no one likes talking about money. But in reality, almost everyone faces financial hardships. It is important to talk about finances. It is important to see or read real examples of people paying off debt. Our team wants to share real advice. We want our customers to know that if they are struggling with debt, they are not alone. Many people experience credit card debt. Even we have experienced debt. It is possible to get out of the debt trap. It just takes time and work.
Preventing the debt trap – how to stay out of debt
Use online payday loans and debt safely
Payday loans often have a bad rep. They are sometimes associated with debt traps. In many states, there is no law against how many different lenders a person can work with at once. Unfortunately, some people get payday loans just to pay off existing payday loans. It can cause them to rack up debt quickly. The good news though, is that it is possible to get a payday loan without falling into the debt trap.
There are responsible ways to use a payday loan. For starters, only apply for a payday loan for a necessary cost. Use it to cover a home or auto repair. You might get a cash advance loan to help buy or repair a necessary home appliance. If need be, use a payday loan to cover mortgage, rent, or a car payment. It can be better than losing your home or car. Food or groceries are also important items you cannot live without day-to-day. Some people also use payday loans to avoid expensive bank fees or late fees. Instead of being charged $30 for a bank overdraft fee, they may choose to borrow $100 to make it through the end of the month. In exchange, they will likely pay less in fees than the bank would charge them. Only use payday loans for important reasons.
If your application is accepted, only borrow what you need. You might qualify for more money than you need. It can be hard to turn down an extra $100 or $200. In the end of the day though, that is more money you have to pay back at your next paycheck. It is important to only apply for the funds that are necessary.
If you do get a payday loan, try to pay it back as soon as possible. Payday lenders will give you specific due dates based on the chosen product. If you pay back your loan on time, you can keep expenses down by avoiding potential late fees. At Net Pay Advance, we also offer a free extension of up to 3-5 days, depending on your loan type. You can extend your due date with this one-time extension with no repercussions or fees. If you need more time, you can look into our payment plans. We can offer an Extended Payment Plan or a Promise-to-Pay plan for customers, depending on where they are in the collections process.
Our final piece of advice is to only work with one payday lender at a time. Although there are not usually laws on the number of lenders you can work with at once, there are laws on the number of loans you can have out with one company. Avoiding other lenders will help you avoid getting a second payday loan. Only having one loan will help keep you out of the debt trap. Plus, some payday lenders, like Net Pay Advance, offer loyalty programs. At Net Pay Advance, we have a VIP program for our customers with solid re-payment history. They can save money on future loans if they have previously borrowed with us.
There are responsible ways to use payday loans. These strategies can help protect you from getting stuck in a debt trap. There are plenty of ways to prevent falling into a debt trap. Many of these same ideas can be seen in other strategies too.
Do not accept the max
We mentioned earlier that when lending, you should only borrow what you need. The same idea is seen here. You should only buy what you need. Instead of buying the biggest house, find one that meets your needs and is well within your budget. Instead of buying the nicest car, buy one that fits your needs and is well within your budget. It is the same with other purchases. Do not buy more food than you can eat. Do not shop for more clothes than you can wear in a month. Only try to buy things at an amount you need.
Budget and live below your means
We talk later about how to get out of the debt trap by budgeting. If you are not currently in a debt trap, you can still budget to ensure you are staying well below your means. The more places you can save, the more money you can find. Try to spend money conservatively. If you do not need to shop for something yet, try to put if off for at least another month. You might be surprised what items you do not actually need.
Create an emergency savings
If you follow the steps above, you might find yourself with less expenses. What should you do with that extra money you now have? You could save it for a rainy day. We mean it. Sometimes unexpected expenses can feel like a gut punch. They come out of nowhere, and if we do not have funds, they can cause us to fall into debt. Use the money you save and put it towards an emergency fund. Try to save up 3 months of income in one savings account. You can use this money in the future if you have a large unexpected expense. It can be a lot more convenient than taking out money for a loan. In addition to having financial security, you might also feel better emotionally. When you have a safety net, it can help reduce your stress.
Getting out of debt – paying off debt
Follow this guide to pay down debt and get out of the debt trap. Regardless of how much money you owe, you can start getting out of the debt trap today. Paying off a lot of debt can take a long time, but the sooner you get started, the sooner you will be debt-free again. Use this guide if you owe a few hundred dollars in debt. Use this guide if you owe tens of thousands of dollars in debt. Use this guide if you fall somewhere in the middle.
The first step is acknowledging there is a problem. For Jamie, that happened when she realized she only had $100 until her next paycheck. It looks a little different for everyone. Even if you have not experienced a problem yet, it does not mean that there is none. Does your debt currently restrict you? It might not affect you on a day-to-day issue, but it might affect you in other ways. Would you be able to change careers? Would you be able to take a few unpaid days off for a family emergency? Would you be able to move across country if necessary? If you answered no to any of these, you might be trapped by your debt.
Once you have identified that there is an issue, the second step is understanding the extent of the problem. It can be difficult but try to keep your personal emotions out of it. Regardless of how you got there, you need to identify what your current situation is. How much debt do you have? You might need to check your credit report to see what loans you have. You might need to call your bank or check your account online. Adding it up together and seeing the real number may be difficult.
The next step is understanding your finances. The goal is to understand what your day-to-day expenses look like compared to your current income. It can be difficult to get an accurate picture by guessing how much you spend on things. Instead, keep track of your expenses for the next two months. Try to use a card for purchases so that you can have a written summary of how much you spend. Keep receipts for cash purchases and store them in one location. If you pay bills online, take a look at your previous payment history. You do not always spend the same amount each month. Find bills that change month-to-month, like utilities, as well as bills that are not due every month. Once you have a couple months of expenses, add them up to see how much you spend.
You will want to create a budget next. You can budget by month, week, or even paycheck, depending on what works best for you. Start by focusing on your needs. Include things like rent, groceries, and utilities. Then look at your other expenses and see what fits and what does not. Look for ways to save on everything. Can you spend less on shopping, entertainment, or food?
Get creative on how you save money. Riding your bike to work might be more affordable than taking a car. Switching phone plans or dropping a streaming service might help too. Could you downsize your car or decrease the number of times you go to restaurants? Even things as simple as brewing your own coffee or taking lunch to work can help. The more places you can make small changes to save, the more money you can save in a given month.
Stop using your credit cards. It can be difficult at first, but you can do things to make the transition process easier. Cut up your credit card or freeze it in a block of ice. Try using cash for your purchases. If you prefer digital money, or just enjoy the convenience of credit cards, you could get a debit card instead. Debit cards are pre-paid. Instead of using credit, debit cards use the money you already have in your bank account. Debit cards will not allow you to rack up debt.
Be cautious of loans or credit cards. However, you might want to consider a debt consolidation loan. A debt consolidation loan will take all of your current loans and combine them into one big loan. You will still have to pay off the same amount of debt. The tradeoff is that your interest rate likely will not be as high, which may make paying easier. In addition, you will only have to pay one bill for your debt, rather than several.
For extra cash, you could get a part-time job. Fortunately, in our modern world, there are tons of part-time jobs with different flexibility. You could get a traditional part-time job where you work retail or at a restaurant. If you need more flexibility in your schedule, you could get a side gig. Look into driving gigs like Uber or GrubHub. During this difficult time, you might consider a job where you pick up and deliver groceries. If you want to stay home, there are several jobs you could do online. If you know how to type, you can become a transcriptionist or get a data entry job.
By making a plan and sticking to it, you will be well on your way towards paying off your debt. No matter how much money you owe, you are capable of paying it off and living a debt free life!