How to get out of debt with a low income

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Dreams of being debt-free are particularly challenging for individuals with low income. The average American owes between $6,000 to $7,000 in credit card debt alone, and when you add car payments, medical bills and other forms of debt, it may feel like all of your income goes toward paying off debt. If you’re trying to get out of debt on a low income, here are some tips to turn your dreams of a debt-free life into reality.

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How to pay off debt on a low income

Step 1: Stop taking on new debt

If you borrow money from one source to pay another, you’re really just shuffling debt around instead of paying it off. There are good reasons to do this, like opening a new balance transfer credit card to take advantage of a 0% APR introductory period, or consolidating your debt into a personal loan with a lower interest rate. But in general, when you’re trying to pay down debt, you need to stop taking on new debt. Don’t open new credit cards or apply for loans unless there are strategic reasons for doing so, and put a freeze on all unnecessary spending.

Step 2: Determine how much you owe

If you’re overwhelmed by debt, it’s tempting to just ignore the bills that keep coming. Facing what you owe can be intimidating, but if you’re going to pay it off, you need an exact figure. Sit down with every outstanding credit card statement, medical bill or utility bill, and add up what you owe. Next to the principal balance, write the interest rate, late fees and any possible penalties you might have to pay. Without a clear picture of your financial situation, it’s impossible to figure out how to pay off debt with low income.

Step 3: Create a budget

A budget lets you see exactly where your income is coming from and where it’s going. Start by listing all your sources of income and all your recurring, fixed expenses. Fixed expenses are items such as rent or car payments, which don’t change month to month.

Now, subtract the difference between your total income and your fixed expenses. The remainder is the money you have available to put towards variable expenses, such as groceries and clothes — and your debt.

Determine exactly how much cash to set aside every month for variable expenses you can’t cut out, like groceries, then earmark the remaining cash for paying off your debt. Put a line item in your budget for debt payments, stick to it, and increase it whenever you can.

Step 4: Pay off the smallest debts first

After adding up everything you owe, the total number might look intimidating. Getting out of debt on a low income isn’t easy, but celebrating small milestones along the way can keep you going, and decreasing your total number of creditors will ease your anxiety.

Start by paying off your smallest bills. Take care of the $200 balance at the car repair shop, or on a credit card. Seeing those balances go to zero will give you the pride and belief that you can eventually live debt-free, and will clear more accounts from your ledger faster than if you tackled the largest debts first.

Step 5: Start tackling larger debts

Once you’ve paid off the smaller bills, there are several approaches you can take to tackle large debts. We recommend the debt avalanche method, where you make the minimum payments on each bill, then use the rest to pay off the debt with the highest interest rate. Those interest charges add to your debt every month, so stopping the worst bill from accruing will put money back in your pocket.

With this method, you’re keeping more of the money you make each month, which in turn increases your ability to make larger debt payments.

Step 6: Look for ways to earn extra money

If you’re still struggling with how to pay off debt with no money, look for ways to make more money. For better or worse, the “gig economy” has created plenty of opportunities online, from dog-sitting to ride-sharing and graphic design. Find creative ways to maximize your free time, but develop the discipline to always put that extra cash toward your debt.

Step 7: Explore debt consolidation and debt relief options

If the interest keeps piling up, and you’re having difficulty sticking to your budget and juggling multiple payments, explore debt consolidation options first, and then — as a last resort — debt relief.

Debt consolidation is usually just a personal loan that pays off your outstanding debt and combines the balances into a single payment to your new lender. Ideally, the interest rate on your debt consolidation loan will be lower than some or most of your outstanding balances, making the loan not just more convenient, but also more cost-effective over time.

On the other hand, debt relief or “debt forgiveness” companies offer to negotiate with creditors on your behalf, and try to convince them to decrease the amount of money you owe. Before doing so, they often urge you to stop making payments altogether, as a way of applying leverage to convince the creditor to accept some payment instead of nothing at all. While this strategy can work, it’s also guaranteed to negatively impact your credit score. As such, debt relief and debt forgiveness services should always be your last resort.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

Even if you have a low income, it’s possible to get out of debt by following these strategies. If you owe multiple creditors with high interest rates, a debt consolidation loan could help you get out of debt faster. Taking control of your finances now will give you more freedom in the future.