How to Break the Cycle of Debt

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Credit cards have come a long way since 1950, when the first Diners Club cards came onto the scene. In many ways they simplify our lives, saving us time and making our wallets lighter. But the revolving cycle of debt—charge, charge, pay it off, charge again—and how best to manage it, continues to mystify many Americans. Even people with high incomes can get caught in the trap of buying things with credit and not paying off the balances immediately.

Getting out of debt and staying out of debt is often easier said than done. If you're still trying to gain control of your credit cards, follow these five tips to recalibrate your financial system and break the cycle of debt once and for all.

1. Create a plan to pay off any lingering balances.

First things first, you've got to do whatever it takes to get your credit card balance down to zero. CNN's Debt Planner calculator allows you to create a custom and detailed debt payment plan that will work for you.

Paying off credit card balances inevitably requires sacrifice. In order to find extra cash in your budget to put toward your goal, you'll have to cut back on things you've grown accustomed to be spending on. Those who have managed to pay off large chunks of credit card debt in a short amount of time have done so by making choices like eating peanut butter sandwiches or taking the bus to work. Effortless and painless? No, not exactly. But keep in mind, you won't have to do it forever. It's important to remember that the sacrifice is only temporary. And the benefit is exceedingly worth it.

2. Set a monthly spending limit.

When it comes to money management, a little bit of work up front can prevent headaches later on. Rather than adopting a reactionary spending strategy—aka impulse shopping—be proactive by setting a monthly spending limit.

Figure out what your monthly take home pay is by adding up the amount that is deposited into your checking account each month. Next, make a list of all of your necessary bills (rent/mortgage, cable, internet, car payment, etc.) to determine your monthly fixed expenses. Subtract this total from your monthly take home pay to find out how much you have leftover for variable spending each month. Use this amount to set a spending limit for yourself.

For example, if your monthly bills add up to $2,600 and your monthly take home pay is $3,450, that leaves you with $850 per month to divvy up for other things. You may need to set some aside for savings goals or paying off your credit card. Once you've done that, give yourself a hard and fast spending limit. Keep track of your monthly credit card charges and make sure you don't exceed your pre-determined limit. It might be challenging at first, but after a few months your spending will adjust and you'll find yourself naturally staying within your limit. (Trust me, I've seen it happen time and time again.)

3. Always, always pay your cards in full.

When it comes to credit cards, misinformation and bad advice abounds. One example of this is that many people are afraid to allow their credit card balances to reach zero. Some people choose not to pay off their credit card balance, even if they have plenty of money in the bank to cover the bill. Other people leave a couple hundred dollars on their credit card each month because they think the banks require some sort of balance to keep the account open. These approaches are counterproductive, and potentially expensive. When you don't pay your credit cards in full each month, you start racking up interest—which means the total cost of the items you purchased on your credit card will increase overtime.

Paying off your credit cards in full each month is an essential part of breaking the cycle of debt. The key to creating wealth is to spend less than you earn, and part of implementing that strategy means making sure you pay off your entire credit card balance when it's due, if not before. Assuming you have the money on hand, there's absolutely no reason to allow your balance to roll over.

4. Track your spending by paying off your cards at the end of every month.

If used correctly, credit cards are a powerful tool to simplify our financial lives. Keeping track of spending can be time-consuming and burdensome. But with online account access, using your credit card for purchases can actually make sticking to a budget easier.

Credit card due dates often vary and are usually set for odd times in the middle of the month. Make your life easier by committing to pay the balance in full on the last day of every month. Establishing this habit means that at the start of each new month, your account balance will be at $0. If you've set a monthly spending limit of $500 on your credit card, then you can easily track your progress by keeping an eye on your current monthly total. If you notice you've spent $300 by the 12th of the month, you'll know you need to cut back for the rest of the month to stay on track.

Set a recurring calendar alert so you always remember to make the payment on the last day of the month. Or, better yet, sign up for autopay so you don't even have to think about it.

5. Get rid of the cards if you have to.

Credit cards really can offer a lot of benefits, but that doesn't mean they're right for everyone. If you're having trouble breaking the cycle of debt, there's nothing wrong with choosing to opt out. Use debit cards or cash to make sure you never spend more than you can afford. When it comes to personal finance, the important thing is doing what is right for you.

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