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

If you have a low income, these strategies may help you tackle the debt.

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 may be some 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 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. 

Make a list of 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 overall 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 how much cash to set aside every month for variable expenses that cannot be cut out, like groceries, and then earmark the remaining cash for paying off 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.

You may want to try using the debt snowball method, which involves paying off your smallest bills. Take care of that $200 balance at the car repair shop, or on a credit card, for instance, and then use that money toward paying off your next-smallest debt. Seeing those small 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.

the debt snowball, you pay off your smallest debt first and then apply the payments you were using toward that to pay the next-smallest debt.

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. One approach is 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 opportunities to make more money. For better or worse, the “gig economy” has created a variety  of opportunities online, including dog-sitting, ride-sharing, food delivery and graphic design. If you can find creative ways to maximize your free time, put that extra cash toward your debt.

Step 7: Explore debt consolidation and debt relief options

Improving your credit score can also help with your efforts to get out of debt. When you have a low score, you almost always pay higher interest rates on everything from credit cards to personal loans.

“When you have higher interest rates more of your payments are going towards interest, as opposed to paying down the principal,” says Adem Selita, CEO and co-founder of The Debt Relief Company in New York City. “This perpetuates your debt load and means you have to use more of your dollars to knock down the principal on any balances or debts owed.”

In addition, when you have bad credit the options for consolidating debt or transferring your debts to lower APR accounts are much more limited. If you’re facing this challenge, there are a variety of ways to help improve your credit score.

These include checking your credit reports to ensure there are no mistakes, staying on top of payments and paying bills on time every month, not applying for new accounts too often and reducing your credit utilization ratio.

“Any time your credit utilization is above 30%, meaning your balance on a credit card is more than 30% of your credit limit, it will have a negative impact on your credit score,” says James Lambridis, CEO of DebtMD. “Try to pay down your balances so you are at least below the 30% threshold.”

Step 8: Explore debt consolidation and debt relief options

If the interest keeps piling up, you may want to explore debt consolidation options first, and then — as a last resort — debt relief.

Debt consolidation

Debt consolidation is often 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 more convenient and more cost-effective over time.

Debt relief

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 will 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.