It is difficult to figure out how to get out of debt on a low income.
Some people even find ways to get rid of debt without paying. However, there'll always be a catch to that.
While some financial "gurus" advise you to cut back on lattes and avocado toast, these minor changes are unlikely to have a significant impact.
Spending less can certainly help, but there are other, possibly more effective steps you can take to manage your debt.
That said, this article compiles the best ways to get out of debt on a low income.
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How to Pay Off Debt On a Low Income
Your low income shouldn't be a problem for you to pay off your debt if you are well-oriented.
Here are the best ways to get out of debt on a low income.
1. Stop Taking on New Debts
This may be difficult if your monthly expenses exceed your paycheck, but it's critical to avoid new debt if you're already struggling to pay your bills.
Charging necessary expenses on your credit card or taking out a personal loan that you cannot repay will only make it more difficult to repay debt in the future.
It's especially important to avoid high-interest debts like payday loans, which are marketed as a tool to help people bridge the gap between paychecks.
Payday loans are appealing to low-income borrowers because they do not require credit checks; however, they come with triple-digit APRs and short repayment periods (typically two to four weeks), making them difficult to repay.
Payday loans usually pit consumers in difficult to escape cycle of debt.
2. Determine How Much You Owe
Before you can begin to confront your debt, you must first determine how much you owe.
Start by visiting AnnualCreditReport.com, where you can obtain a free credit report from each of the three 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 debts will be listed in your report, with information broken down by lender, loan amount, and credit card balance, for example.
However, keep in mind that your credit report may not include everything you owe.
Credit reporting agencies only have information on accounts and debts that have been reported to them, and there may be a delay in reporting balances, payments, or amounts referred to collection agencies — but it's a good place to start.
Gather your bills or log into your online accounts to record the balances due, interest rates, minimum monthly payments, and creditor names.
You can also use a budgeting app (such as LendingTree, Mint, or Goodbudget) that allows you to log into your bank accounts and track your balances.
3. Create a Budget
With your debt list in hand, create a budget that compares how much money you spend each month to cover minimum loan repayments and daily costs to how much income you have. You can use an app like the ones mentioned above to automate your budget, or you can create your own budgeting spreadsheet.
To keep your finances on track, consider using the 50/30/20 budget method:
- 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.
Take a look at what's left over at the end of the month after you've listed all of your take-home pay and all of your spending.
If you don't have any balance left over to repay debt, consider cutting your "wants" category expenses if possible. And, if possible, you could contribute more than 20% of your income to savings and debt repayment to get out of debt faster.
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4. Limit Extra Spending
You may need to limit your spending in other areas to keep up with (or get ahead on) your debt payments. Begin by considering your major expenses, such as rent and transportation.
Consider trading down to a less expensive vehicle if your monthly car payment is out of control.
If you've overspent your budget on a high-priced apartment, you might consider moving to a less expensive location, at least until you get a handle on your debt.
There may also be lifestyle changes you can make to free up some cash in your budget. Here are a few ideas that might be useful:
- 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 determined to spend less money, you may need to inform your friends and family of your plans.
That way, they can be there to support you as you make these lifestyle changes, rather than pressuring you to spend more than you want to when you get together.
5. Increase Your Income
When it comes to taking control of your finances, saving money is one side of the coin; earning more is the other. Consider ways to make more money if you have the time.
Driving for a ride-sharing service, offering services through a site like TaskRabbit, or working online as a freelancer are some ideas for side hustles.
If you work full-time, you should consider applying for a higher-paying job or requesting a raise at your current job.
There are numerous ways to earn extra money, which you could use to pay down your debt.
6. Start Tackling Larger Debt (Using Debt Snowball or Debt Avalanche Method)
After you've paid off your smaller bills, you have several options for dealing with large debts.
The debt avalanche method involves making the minimum payment on each bill and then using the remainder to pay off the debt with the highest interest rate.
Every month, those interest charges add to your debt, so preventing the worst bill from accruing will put money back in your pocket.
With this method, you keep more of your monthly earnings, which increases your ability to make larger debt payments.
Additionally, using the debt snowball method, you can build momentum to quickly pay off your debt.
Using this debt repayment strategy, you'll begin by paying off the smallest debts first, eliminating the less intimidating balances before progressing to larger, more expensive debts.
Because you start with smaller balances that can be repaid faster, the debt snowball method makes it easier to eliminate the number of debts you have. Debt repayment can be less of a puzzle with fewer debts to juggle.
7. Negotiate With Your Creditors for Better Rates
If your debt's interest rates are making it difficult to keep up, you may be able to lower them.
Call your creditors and try to negotiate a lower interest rate.
If you've made payments in the past, you're more likely to get a positive response.
When making your request, you could mention that you've kept your account in good standing.
If you can reduce your interest rates, you will save money on your debt and may be able to pay it off sooner.
8. Explore Debt Consolidation and Debt Relief Options
If the interest continues to mount, you may want to consider debt consolidation first, followed by debt relief as a last resort.
Debt Consolidation
Debt consolidation is typically a personal loan that pays off your existing debts and combines the balances into a single payment to your new lender.
The interest rate on your debt consolidation loan should ideally be lower than the interest rate on some or all of your outstanding balances, making the loan more convenient and cost-effective over time.
Debt Relief
Debt relief or "debt forgiveness" companies offer to enter negotiations with creditors on your behalf in order to reduce the amount you owe.
Before doing so, they frequently advise you to stop making payments entirely in order to use leverage to persuade the creditor to accept some payment rather than none at all.
While this strategy may be effective, it will have a negative impact on your credit score. As a result, debt relief and debt forgiveness services should only be used as a last resort.
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Final Thoughts: How to Get Out of Debt With a Low Income
Even with a low income, you can use these strategies to get out of debt
If you owe money to several creditors, each with a high interest rate, a debt consolidation loan may help you get out of debt faster. Taking charge of your finances now will give you more freedom later on.