Debt Consolidation
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How to Get Out of Debt on a Low Income

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Figuring out how to get out of debt on a low income is no easy feat. While some financial “gurus” tell you to cut back on lattes and avocado toast, these small changes probably aren’t going to make a huge impact.

Cutting down on your spending can certainly help, but there are other, perhaps more effective steps you can take to manage your debt. Here are eight steps to explore, but keep in mind that the best way to get out of debt depends on your financial situation.

1. Stop acquiring new debts

This may be difficult to do if your monthly expenses are bigger than your paycheck, but it’s important to stay away from new debt if you’re already struggling to pay your bills. Charging necessary expenses on your credit card or opening a personal loan you can’t pay off will only make it harder to repay debt in the future.

It’s especially necessary to avoid high-interest debts like payday loans, which are marketed as a tool to help tide people over until their next paychecks. Payday loans don’t require credit checks, which makes them alluring to borrowers with low income — however, they also come with triple-digit APRs and short repayment periods (typically two to four weeks) making them difficult to repay.

Payday loans often trap consumers in a cycle of debt that’s difficult to escape.

2. Know how much you owe

Before you can tackle your debt, you need to determine exactly how much you owe. Start at, where you can get a free credit report from each of the major credit reporting agencies — Equifax, Experian and TransUnion (due to the COVID-19 pandemic, the credit bureaus are currently allowing you to pull your credit reports weekly). Your report will list out your debts, breaking information down by lender, loan amount and credit card balance, for example.

Keep in mind, though, that your credit report may not include everything you owe. The credit reporting agencies only have information on the accounts and debts that are reported to them, and there may be a delay in reporting balances, payments or amounts referred to collection agencies — but it’s still a good place to start.

You should also gather your bills or log into your online accounts and take note of the balances due, interest rates, minimum monthly payments and creditor names. You can also use a budgeting app (like LendingTree, Mint or Goodbudget) that lets you log into your bank accounts and keep track of your balances.

3. Create a budget

With your list of debts in hand, start working on a budget to compare how much of your money goes out each month to cover minimum debt payments and living expenses to how much income you have. You can automate your budget with an app like the ones mentioned above, or you can work on your own budgeting spreadsheet.

Consider using the 50/30/20 budget method to keep your finances on track:

  • 50% of your income should go to “needs,” like mortgage payments, groceries and other necessary expenses.
  • 30% of your income should go to “wants,” like dining out, streaming services and other forms of entertainment.
  • 20% of your income should go to debt repayment and savings, including retirement savings and an emergency fund.

Once you’ve listed all your take-home pay and all your spending, take a look at what’s left over at the end of the month. If you don’t have any balance left over to repay debt, then consider cutting your expenses in the “wants” category, if possible. And if you can, you could contribute more than 20% of your income to savings and debt repayment to get out of debt faster.

4. Cut your spending

To keep up with (or get ahead on) your debt payments, you might need to cut your spending in other areas. Start by looking at your major expense categories, such as rent and transportation.

If your monthly car payment is breaking the bank, for instance, consider trading down to a less expensive vehicle. Or if you’ve over-stretching your budget on a pricey apartment, you could think about moving to a less expensive place, at least until you get a handle on your debt.

There might also be lifestyle changes you can make to find extra room in your budget. Here are a few ideas that could help:

  • Look for coupons or promo codes before you make a purchase
  • Cook at home instead of eating out at restaurants
  • Ditch your gym membership in favor of working out from home or outside
  • Turn off any subscription services you’re paying for but no longer using
  • Switch your phone plan to a less expensive service
  • Look for free entertainment in your area, such as free concerts or hiking in parks

If you’re committed to spending less, you might also need to tell your friends and family about your intentions. That way, they can support you as you make these lifestyle changes and hopefully not pressure you into spending more than you want to when you get together.

5. Find ways to earn more money

While saving money is one side of the coin when it comes to taking control of your finances, the other side is earning more. If you have time, think of ways that you could make more money.

Some side hustle ideas include driving for a ride-sharing service, offering services through a site like TaskRabbit or working online as a freelancer. If you work full time, you might also consider applying for a new job with a higher salary or asking for a raise at your current one.

There are lots of ways to earn extra cash, and you could use this additional money to pay down your debt.

6. Utilize the debt snowball or debt avalanche method

The debt snowball and debt avalanche are two useful strategies for paying off debt ahead of schedule.

At a glance: Debt snowball vs. debt avalanche

Debt snowball: Pay off your smallest debts first while making the minimum payment on your other debts.Debt avalanche: Pay off high-interest debts first while making the minimum payment on your other debts.

Debt snowball

Gather momentum to pay down your debt quickly with the debt snowball method. Using this debt repayment strategy, you’ll pay off the smallest debts first, knocking out the less intimidating balances and working your way up to bigger, more expensive debts.

The debt snowball method makes it easier to eliminate the number of debts you have, since you start with smaller balances that can be repaid faster. With less debts to juggle, debt repayment can be less of a puzzle.

Debt avalanche

The debt avalanche method eliminates the most costly debt first by targeting the debts with the highest interest rates. This ensures that you’re saving the most money on interest in the long run. However, if your highest-cost debts have large balances, it may feel as though you’re making slow progress to start.

If you’re having trouble paying off big debts, consider lumping your debt together with a debt consolidation loan (more on this below).

7. Negotiate with your creditors for better rates

If the interest rates on your debt are making it difficult to keep up, you might be able to adjust them down. Try calling your creditors to negotiate a lower rate.

You’ll be more likely to get a positive response if you’ve kept up with payments in the past. You could point out that you’ve kept your account in good standing when you make your request.

If you can lower your interest rates, you will save money on your debt over time and might be able to pay it down more quickly.

8. Explore debt relief options

If you’re earning as much as you can and there are no more areas to trim, it may be time to consolidate debt or explore other debt relief options.

Here are a few common debt relief methods to consider:

Debt consolidation

It’s easy to miss payments and lose track of your expenses when you have to keep up with numerous bills every month. To make repayment easier, you could consider consolidating your debt into a single monthly payment. Plus, you may be able to secure a better interest rate, get lower monthly payments or pay off debt faster when you consolidate.

Here are a few common debt consolidation options:

3 ways to consolidate debt

Balance transferConsolidate credit card debt onto one credit card with a lower APR using a balance-transfer card. This may come with a balance transfer fee (typically 3% to 5%), but borrowers may be eligible for an introductory 0% APR offer that lasts as many as 21 months.
Debt consolidation loanPay off multiple kinds of debts using a personal loan, which can be used for almost anything. Personal loans are unsecured, so they don’t require any collateral and are backed only by your promise to repay the lender. APRs vary widely across credit bands.
Home equity loanUsing your home as collateral, you may be able to secure a lower APR than with unsecured debt. Expect to pay closing costs, typically 2% to 5% the cost of the loan. However, the risk here is losing your home if you default on the loan.

Credit counseling service

Credit counselors usually operate as part of nonprofit organizations that help consumers make a plan for managing their money and debts. Initial consultations with a credit counselor are typically done at no cost.

Credit counselors may be able to help you set up a debt management plan (DMP) to repay your debts, reach an agreement with your creditors to hold off on collection efforts and late fees while you are on the plan and rebuild your credit after.

A DMP will last about three to five years, and your counselor may be able to negotiate lower interest rates or monthly payments to make repayment more manageable. Keep in mind DMPs aren’t for everyone and the programs may have monthly fees, which you should ask about in advance.

You can find a list of legitimate credit counseling services through the U.S. Department of Justice.

Debt settlement

Debt settlement or debt relief companies are for-profit companies that negotiate with your creditors to settle your debt for a lump sum that is less than what you owe. You’ll have to pay a fee to the debt relief company for them to negotiate on your behalf.

However, in general, it isn’t a good idea to work with a debt settlement company: You’re paying for a service you could do yourself. It may be possible to settle debt on your own, if you talk to your creditors.

While these companies may help you settle some debts, there are major risks involved. For example, a debt settlement plan may advise you to purposely miss payments on your debts, which will incur fees and affect your credit. Plus, settled debt appears on your credit report and will hurt your credit. To make matters worse, the results aren’t guaranteed, so you may risk purposefully missing payments for nothing.

Both the CFPB and the Federal Trade Commission (FTC) warn consumers to proceed with caution before paying a company to negotiate debt on your behalf.


In certain circumstances, filing for bankruptcy may be the only way to resolve your debts and get a fresh start. When you’re at risk of losing your home or have bills in collections that you can’t pay off, bankruptcy may be the right financial tool for your situation. Most individuals have two options for declaring bankruptcy, Chapter 7 and Chapter 13 bankruptcy. Here’s a simple explanation of the two:

  • Chapter 7 bankruptcy: Your assets are sold to pay off creditors, and remaining debts are discharged. This type of bankruptcy will remain on your credit report for up to 10 years.
  • Chapter 13 bankruptcy: You set up a plan to repay all or part of your debts while keeping your assets. Chapter 13 bankruptcy will stay on your credit report for up to seven years.

To decide which bankruptcy option is best for you, talk to an experienced personal bankruptcy attorney who’s familiar with the laws of your state. You can get a list of attorneys in your area by calling your local bar association.

Bonus tip: Don’t neglect your emergency fund

You don’t have to choose between getting out of debt or saving up. Starting an emergency fund is paramount to getting out of debt. If you don’t have any savings set aside when disaster strikes, it’s easy to fall further into the cycle of debt with just one financial setback.

Here are a few tips for how to start an emergency fund:

  • Calculate your monthly expenses, and start small. Ideally, an emergency fund would cover your basic monthly expenses for about six months. However, it makes sense to start with the goal of covering one month’s worth of expenses first.
  • Set up recurring transfers or direct deposit from your paycheck. If you divert a small amount from each paycheck directly into your emergency fund, you’ll be adding to it every time you get paid without having to think about it.
  • Utilize a high-yield savings account. Your emergency fund should be easy to access, but it doesn’t have to be in cash or checking. A high-yield savings account may let you accrue interest on your emergency fund without withdrawal penalties.
  • Celebrate your successes. If you reach a goal in savings or debt repayment, celebrate in a way that makes sense for you and your financial situation: whip up your favorite dessert, take a hike at a local park or even have a spa day right at home. You can still treat yourself without sacrificing your financial goals.

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