Figuring out how to pay off debt when you’re not earning a lot can be difficult. But even with a low income, you might be able to pay off debt if you follow the steps listed below.
Drowning in debt and feeling like there’s no way out? You’re not alone. Millions of people struggle with debt, and it can feel overwhelming. But don’t despair! Getting out of debt with no money is possible. It takes time, effort, and dedication, but it’s achievable.
Here’s a step-by-step guide to help you navigate your way out of debt, even if you’re feeling financially strapped:
Step 1: Stop the Bleeding: Cut Off New Debt
First things first: Stop digging yourself deeper into the debt hole This means putting a firm stop to taking on any new debt. Resist the urge to use credit cards, take out payday loans, or tap into lines of credit Remember, every new debt adds to your burden and makes it harder to climb out.
Step 2: Face the Facts: Assess Your Debt Situation
Knowledge is power. To effectively tackle your debt, you need to understand what you’re dealing with. Gather all your bills and statements and create a comprehensive list of all your debts Include the creditor, amount owed, interest rate, and minimum payment for each debt. This will give you a clear picture of your financial situation and help you prioritize your repayment efforts.
Step 3: Budget Like a Boss: Create a Spending Plan
Creating a budget is crucial for managing your money and getting out of debt. Track your income and expenses for a month to understand where your money goes. Look for areas where you can cut back, like eating out less often or canceling unused subscriptions. Allocate every dollar you earn to either debt repayment or essential expenses.
Step 4: Prioritize Your Debts: The Debt Avalanche vs. Debt Snowball
The debt avalanche and the debt snowball are the two primary methods of debt repayment.
Debt avalanche: Regardless of the total amount owed, this strategy concentrates on paying off the debt with the highest interest rate first. This saves you money on interest in the long run.
Debt snowball: Regardless of interest rate, this strategy concentrates on paying off the smallest debt first. This can provide a psychological boost and motivate you to keep going.
Choose the method that best suits your personality and financial situation.
Step 5: Tackle the Big Guns: Pay Off Larger Debts
Once you’ve paid off the smaller debts, focus on the larger ones. Allocate as much money as possible towards these debts, while still making minimum payments on the others. This will help you chip away at the principal faster and reduce the overall interest you pay.
Step 6: Boost Your Income: Explore Extra Cash Opportunities
Earning extra money can significantly accelerate your debt repayment journey. Look for ways to increase your income, such as taking on a side hustle, selling unused items, or renting out a spare room. Even a small amount of extra income can make a big difference.
Step 7: Credit Score Power Up: Improve Your Credit Score
A high credit score can help you access better financial opportunities and reduce your interest rate. Maintain a low credit card balance, pay your bills on time, and refrain from opening too many new accounts. These steps will help improve your credit score over time.
Additional Resources to Help You Get Out of Debt:
- National Foundation for Credit Counseling: https://www.nfcc.org/
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/topics/debt-collection/
- Debt.com: https://www.debt.com/
Remember, getting out of debt is a marathon, not a sprint. There will be setbacks and challenges along the way, but don’t give up. Stay focused, motivated, and keep taking steps towards your goal. With perseverance and the right strategies, you can break free from debt and achieve financial freedom.
Step 2: Choose a strategy to pay off your debt
There are various ways to pay off debt, and the most effective one for you will rely on the figures from Step 1 and your unique circumstances.
If your budget has room for extra debt payments, then consider some of the traditional debt solutions below. If you’re strapped for cash, however, skip down to “alternative debt solutions. ”.
You’ll always want to make at least the minimum payment for every debt you owe. However, if you have spare cash for more payments, which credit card or loan should you focus on paying off first? Here are two typical approaches:
By using the debt snowball method, you pay off the debt with the lowest balance by adding any additional payments you can manage. This will enable you to pay off loans and other debts more rapidly, which will boost your confidence as you see the list of obligations get shorter.
For the debt avalanche method, you focus any extra payments on whichever debt has the highest interest rate. This should save you the most amount of money over time.
Both of these approaches work, according to a 2023 LendingTree study, so pick the one that makes the most sense for you and follow it through to debt freedom.
Perhaps your issue isn’t so much how to pay off debt quickly as it is how to just make your monthly payments on time. In this case, you may need one of these alternative debt strategies.
Debt consolidation loans are new loans that you take out to pay off current debts. This might be a wise choice if you can obtain an APR that is less than what you are now paying on one or more of your debts. (Try our debt consolidation calculator to see what you might save. ).
There are, in fact, debt consolidation loans available for people with poor credit, though you might have problems locating one with an interest rate that is low enough to be worthwhile.
Balance transfer credit cards
A balance transfer credit card, or A%200%%20balance%20transfer%20credit%20card, provides a promotional period %20%E2%80%94%20typically between %2012%20and %2021%20months %20%E2%80%94%20during which they won %E2%80%99t charge you any interest.
A balance transfer card could be the best choice for you if you have good or excellent credit and can afford to pay off your debt before the promotional period expires.
If you own a house, you may be able to get a “second mortgage” or home equity loan at a competitive interest rate. ”.
This could be something to think about if you want fixed monthly payments and have a lot of equity in your home. But take caution: If you default on a home equity loan, you could lose your house to foreclosure.
A 401(k) loan borrows money from your own retirement plan. These loans can work for people with bad credit, since they don’t require a credit check.
Loans aren’t always possible with 401(k) plans, and they’re typically best utilized if you intend to remain employed for the foreseeable future. This is due to the possibility that you would have to repay the loan right away in order to avoid paying a tax penalty if you quit or are fired.
Getting credit counseling from a certified credit counselor can help you create a plan to tackle your debt. Your credit counselor might even be able to help negotiate lower payments or rates with your lenders.
To work with a credit counselor, though, you might have to pay a small fee, and many of them demand that you refrain from using credit cards until your debt is settled.
For more strategies and tips, see our guide to becoming debt-free.
Look up your credit score
Ultimately, understanding your credit score will help you determine the best debt repayment plan. With LendingTree Spring, you can obtain your credit score for free and receive notifications of any changes.