6 Thinking Errors Keeping You Stuck in a Debt Cycle

Here are six common cognitive distortions that can keep you trapped in debt:

1. All-or-Nothing Thinking

All-or-nothing thinking is when someone sees things as either completely good or completely bad. There is no middle ground. This 

kind of thinking can make people feel like failures if they do not meet their goals perfectly. It can stop them from trying again. 

Here is an example of a boy named Harshit:

In February, Harshit saved ₹500 but felt like a failure because it was not ₹1,000. In March, he gave up and saved nothing.

2. Overgeneralisation

Overgeneralisation is a thinking error where one bad event makes a person believe that all future events will be bad too. This can lead to feelings of hopelessness and can stop people from trying again. 

It often includes words like “always” or “never”. For example, failing once at something might make someone think they will always fail. This kind of thinking can trap people in a cycle of debt or failure. 

Example: Tarun’s Spending Habit

Tarun believes he always fails with money, even when he improves. This overgeneralisation stops him from seeing his progress. By noticing this, he can start to change his thinking and habits.

3. Mental Filtering

Mental filtering is a thinking error where a person focuses only on negative details and ignores the positive ones. This can lead to feelings of failure and hopelessness. It often keeps people stuck in a debt cycle.

For example, Nitin is a 24-year-old from Bengaluru. He earns ₹25,000 per month and pays ₹5,000 towards his loan. One month, he had an unexpected expense of ₹3,000. He focused only on this setback and felt like a failure. He ignored the fact that he had paid ₹20,000 towards his loan over four months.

Nitin's mental filter made him ignore his consistent payments and focus only on one bad month.

4. Catastrophising

Catastrophising is a thinking error where people expect the worst possible outcome, even if it's unlikely. This mindset can trap individuals in a debt cycle. They may feel hopeless and avoid taking action, which worsens their financial situation. 

Example: Neeraj's Catastrophising in a Debt Cycle

By identifying these catastrophic thoughts, Neeraj can replace them with realistic perspectives.

5. Personalisation

Personalisation is a thinking error where people blame themselves for things beyond their control. This can lead to guilt and stress. In money matters, this can cause a person to feel responsible for all financial problems, even when other factors are involved. This thinking keeps people stuck in debt.

Example: Jay’s Story

Jay is a 24-year-old man from Bengaluru. He earns ₹25,000 per month. He took a personal loan of ₹1,00,000 to help with his father’s medical bills. Now, he feels guilty every time he spends money, even on essentials. He thinks, “It’s my fault we are in debt.” 

This guilt stops him from seeking help or planning better.

To break this cycle, Jay needs to understand that not all problems are his fault. Seeking advice and making a budget can help.

6. Emotional Reasoning

Emotional Reasoning is a thinking error where people believe their feelings are facts. For example, if someone feels hopeless, they think their situation is truly hopeless, even if it's not. This can trap people in a cycle of debt. 

They may feel anxious about money and believe they are bad with finances, leading to poorer choices. This belief can stop them from seeking help or making better plans. Recognising that feelings are not always facts is key to breaking this cycle.

Example: Yash's Spending Pattern

Conclusion

These thinking errors trap you in debt. Recognise them to make better money choices and break the cycle.

FAQs

1. What is all-or-nothing thinking?

Seeing small money mistakes as total failures.

2. How does catastrophising hurt?

Assuming that debt will ruin everything stops progress.

3. Why is emotional spending bad?

Buying to feel better just adds more debt.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?