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How to deal with debt when you have bad credit
Your credit score and budget might not limit your options as much as you think.
Having bad credit doesn't mean you're doomed to be in debt forever. In fact, many strategies to get out of debt don't depend on your credit score at all. When deciding which strategy to get out of debt, look for a plan that you can see all the way through.
8 ways to get out of debt when you have bad credit
You'll likely need to use a combination of these strategies to make it all the way to debt freedom.
1. Take stock of your debt
The first step to getting out of debt is knowing how much you owe. Tally up your accounts with different creditors, taking note of the rates, how much your monthly payments are and when they're due. If you've missed a monthly payment, make note of how long it's past due and how much you owe in late fees.
With loans, also make note of whether your lender charges a prepayment penalty. Prepayment penalties are a fee lenders charge when you pay off the loan ahead of schedule.
Having this information can help you decide which debts to focus on first and what type of debt repayment strategy to choose. For example, a debt relief program can be helpful if you owe over $7,500 and don't think you can pay it off within a year.
2. Spend less than you make
If your budget allows it, cut down on monthly expenses and put the savings toward your debt. This doesn't necessarily mean that you need to make extreme changes — especially if you're already living paycheck to paycheck. Something as simple as shopping at a different grocery store, negotiating down your phone and Internet bills or switching car insurance providers can shave hundreds of dollars off your monthly budget.
In fact, paring down too much can backfire. If you get rid of everything that makes you feel human, it can actually make it it harder to stick to your plan. Opt for a skinny budget that you can comfortably sustain while you're paying down your debt.
3. Keep building your credit with on-time payments
Each time you make an on-time payment, it adds to your positive credit history. Not only that, but missing a payment usually comes with late fees — which just adds to how much you owe. And if an account goes to collections, you'll have fewer options to get out of debt.
So prioritize those monthly credit card minimums and loan payments as much as you can while paying down your debt — even if you aren't focusing on paying down the account. It'll help you save in the long run and keep your options open.
4. Build your credit by reporting non-debt payments
Another way to build your credit is by signing up for a free service like Experian Boost, which factors in payments toward utility bills, rent and even your streaming accounts when calculating your credit score. Experian claims that the average user saw an increase of around 13 points.
Having better credit isn't essential to getting out of debt. But increasing your credit score can help expand the options available to you. And it might make your creditors more willing to negotiate.
5. Look into credit counseling
Credit counseling involves setting up a free one-on-one session with a professional to go over your finances and come up with a repayment strategy. It can be helpful if you feel like you've already tried everything or want a second opinion. And it's required if you plan on filing for Chapter 7 bankruptcy.
You can find a government-approved nonprofit credit counselor on the Department of Justice's website. But if you're not up for being vulnerable to a stranger about your finances, hold off on signing up — at least until you feel ready.
6. Make a plan and stick to it
You don't need to go to a credit counselor to come up with a plan to get out of debt. Some common DIY strategies include the avalanche and snowball method.
The avalanche method involves making extra payments to accounts with the highest interest rates first. This can save you the most and close your accounts faster than if you stuck to a minimum payment plan.
The snowball method can be more motivating, however. It involves paying off the smallest accounts first so you start off with a few easy wins — and fewer bills to juggle every month. Using a debt management app like Debt Payoff Assistant can make this process easier to track, but it's not required.
7. Seek help with a debt relief program
Debt settlement involves hiring a professional to negotiate down your balances in exchange for a one-time payment, usually for a fee of 15% to 25% of the debt you enroll in the program. Legitimate debt settlement programs like National Debt Relief can slash your balances by between 30% and 50% before fees.
This can be helpful if you owe too much to manage on your own and can't qualify for debt consolidation. But it can increase your monthly expenses while you're enrolled. You have to continue to make minimum payments toward your creditors and contribute to a settlement fund for two to four years, which can be difficult to manage on a tight budget.
Before the government tightened regulations on debt relief companies, many would charge upfront fees and never contact your creditors. Since, the Federal Trade Commission has created a list of people and companies banned from debt relief to help you avoid this and other debt relief scams.
As a last resort, bankruptcy can help you start over. Chapter 7 bankruptcy gives you a clean slate by canceling most of your debts — though student loans can be tricky. But you'll lose assets like your house and car — and have to pass a means test to show you just can't pay off the debt.
Chapter 11 and 13 put you on a modified payment plan instead of canceling your balance — which you may be able to do on your own by reaching out to your creditors.
Bankruptcy should be treated as a last resort. It can stay on your credit report for as long as 10 years and make it difficult to buy a house or car during that time. It can also affect your job and rental prospects, since employers and landlords sometimes check your credit.
Consolidating debt with bad credit
Debt consolidation can be useful if you owe less than half of what you earn in a year. While it's usually for good credit, you still might benefit from debt consolidation if your credit has improved since you originally took on the debt. Even if you can't qualify for a lower rate, it can still cut down on the number of bills to keep track of each month.
If you have a lot of credit card debt, the easiest option might be a balance transfer credit card that accepts bad credit. Otherwise, a bad credit personal loan could be a better option.
As long as you have a plan that you can stick to, getting out of debt is possible — even if you have bad credit and no extra money. You can learn more about your options by reading our guide to debt relief.
Frequently asked questions
Answers to more questions you might have about paying off debt with bad credit.
How do I get out of debt fast with no money?
The best way to get out of debt fast when you have no money depends on your debt load and budget. For example, using the avalanche method could be your fastest choice for smaller debts — say, under $5,000.
But if you think it'll take years to get out of debt on your own, debt settlement could be quicker. Consider signing up for credit counseling if you want personalized professional advice on the best path forward.
How do I talk to a creditor if I can't make a payment?
Timing is more important than what you say when it comes to telling a creditor you'll miss a payment. Many offer hardship deferment if you reach out ahead of your due date, so skipping the payment won't affect your credit score. Reaching out ahead of time is also a sign that you're on top of your finances — and your creditor will likely be more flexible.
How do I pay off $25,0000 in debt?
It all depends on your budget and how quickly you want to get out of debt. If you make more than $50,000 a year, you might be able to qualify for a debt consolidation loan. Otherwise, DIY debt repayment methods like debt avalanche or even a debt relief program can help.
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