How To Get Out Of Debt on a Low Income
How many times have you tried to get out of debt? The economy is forcing almost everyone to be in debt these days. Whether it’s from student loans, a mortgage, or credit cards, many people find themselves buried under huge sums of money they owe to someone else. The question that always comes up when those of us who are struggling with debt is: how do you get out? Many times, you can’t. It’s nearly impossible to meet all your financial obligations and have enough money left over to do things like feed yourself, pay for rent/mortgage, and put gas in the car.
You become a slave just trying to keep one step ahead of the bill collectors. The trick is in knowing what steps to take when it comes time to start digging your way out of debt.
There are four general steps you should take:
Debt Management –
The easiest, fastest way is to find a reputable credit counselor and work with them on how to pay off your payments or consolidate your debts for less interest. If this isn’t something that can be done, there are other options.
Debt Consolidation –
You can consolidate your debts if you have equity in an item. You do this by taking the money you would use to pay on a big credit card debt and instead get that same amount of cash from buying out one of your other, smaller debts. The downside is: you will not be reducing your total amount of debt but putting it in a different place. The upside is: you will get out of debt faster with this method, and can use your extra cash to pay off the new one.
Debt Negotiation –
Once you have consolidated all your debts into one larger debt you owe to yourself, then start looking for companies that may be willing to negotiate lower interest rates with you. Interest is the enemy of those in debt, so the more you can do to reduce your interest rate the better off you will be. This way, when you have paid down your total amount borrowed, it will take less time for you to pay it back than if the interest rates were high. Using a credit card to pay off another one will work, as long as you call and negotiate to get the interest down on your new debt.
Debt Reduction –
This is where you try to lower your payments by paying more than the minimum each month. This can be very hard for some people, but it’s not impossible. Try asking your creditors if they will accept payments higher than the minimum each month. Sometimes, just contacting them and asking can get you a deal. If that doesn’t work, prepare yourself for some serious belt-tightening.
The following tips will help you tackle your debt responsibly:
Tired of seeing your debts linger? Want to take a proactive approach to eliminate them and rebuilding your credit score? By following the below tips, you can do your best to start eliminating your debts and working on improving your credit score.
1. Make a budget
Don’t start racking up debt without a plan. If you have no idea where money is going each month, it’s time to make a budget. Use the envelope system if you need to; just put every dollar in its place and watch how much more deliberate you become with your money.
If you have more than $2000 worth of credit card bills, student loans, or car payments, you need a repayment plan. A debt repayment plan is an emergency fund on steroids. It includes your savings as well as any available cash flow into one dedicated account earmarked for debts and includes specific amounts to be applied to each debt, either monthly or quarterly.
It’s also important for you to create a plan for how you’ll handle emergencies. You don’t want to be making decisions about which bills get paid when your car needs a new radiator. Your emergency fund should allow you (and/or your family) to take care of those expenses and still have enough left to pay your debts.
If you’re carrying high-interest balances on credit cards, your best chance of eliminating those debts early is to pay more than the minimum each month. While it may seem like paying only the minimum will save you money in interest — and it will — paying extra can help stop snowballing debt.
2. Negotiate with creditors to lower interest rates and pay off debt faster
Ask your creditors to lower your interest rates, as this will reduce the number of payments you need to make each month. If they are not willing to do so, inquire about transferring balances or loans to other credit cards with lower interest.
You can also negotiate with your creditors for extra time on payment schedules. Typically, if a creditor finds that you are a customer who is reliable and predictable in making payments, they will be willing to change the terms of your loan. Pay off debt by negotiating with creditors to lower interest rates and/or extend the payoff terms of a loan. Negotiation may help you to pay off debt faster.
You can also negotiate with your creditors for extra time on payment schedules. Typically, if a creditor finds that you are a customer who is reliable and predictable in making payments, they will be willing to change the terms of your loan.
3. Consolidate all debts into one larger, easier-to-manage payment
Consider transferring all credit card accounts into a single credit card with a lower interest rate. This is especially helpful if you have multiple cards in good standing and you can transfer the balance to one of those without incurring any fees.
If you have high-interest rate debt, it’s best to pay off that debt using a longer period of time and the highest rate of interest. Start with the accounts that have lower balances and smaller rates of interest to give yourself a sense of accomplishment as you tackle larger amounts of debt until you pay it all off!
Then move on to consolidate other debts such as student loans or personal loans into one monthly payment. You can also talk to your creditor about creating a payment plan that fits into your budget.
Do you have one large credit card with a high-interest rate? Try calling the credit card company and asking to lower the interest rate of your current balance. Many times, they’ll be eager to help since it’s difficult to collect any money from you if you’re no longer using the card.
If you have a credit card with a low-interest rate, is it another card that has no annual fee and also has the same rewards? If so, ask if you can transfer your balance to the new card. Creditors want to keep their customers happy!
4. Get help from a credit counselor to get out of debt fast and easily
To get out of debt fast and easily, you need the help of a credit counselor. A credit counselor is an organization that helps people who are struggling with their debts to come up with a plan to pay them back in a budget-friendly way. Most reputable counselors will work with you on a payment schedule – not unlike the one outlined above.
They are great at negotiating with creditors to get lower interest rates, and they will help you stick to a budget that works. They also have the added benefit of being able to help you come up with a secure plan for your debts if you find yourself in financial trouble again in the future.
There are two types of credit counselors – those that are non-profit, and those that work for the creditors. Only work with a credit counselor who has no affiliation with any of your creditors – or else they may have ulterior motives.
A credit counselor can help you to get out of debt fast and easily, or negotiate with your creditors for a lower payment. They can also help you come up with a plan if you find yourself in financial trouble again in the future.
You can find a local credit counselor by going online and searching for “credit counseling” along with your area code – or by calling a credit counselor and asking for recommendations of one in your area. Just remember to ask if they work independently from any creditors – because that will be important!
The best way to get out of debt fast is by getting help from a reputable credit counselor who can negotiate with your creditors on your behalf.
5. Get out of debt fast by using the snowball method to pay off your smaller debts
Even if you’re trying to pay off your high-interest debts, there are still some smaller debts that you can start tackling with the snowball method. If you have a small debt, say $1000 on a $2000 credit card and another at $500 on a $2500 line of credit, then just put all the extra money each month that you can afford on the smaller card until it’s paid off. When that one is paid off, take the money that you’ve been paying there and put it to work on your next smallest debt – repeat! This method will help you get out of debt fast as long as you stick with it.
Beating debt using this method means that you have to be able to put all of your extra money toward paying down the debt. The good news? Many people who are working toward getting out of debt have a side job or additional income source – if you have this, then putting all extra funds into paying off your debts will be much easier because you won’t have to make tough choices between paying down your debt or buying the things you need.
Don’t be afraid to use this money for your debt payments either – it’s all extra money that you didn’t have earmarked for anything in particular, right? Don’t worry about whether this is the best use for that portion of your income or not, just focus on getting rid of your debt. The less free cash flow available to pay your debts, the longer it’s going to take you to get out of debt – so stop thinking and just do it!
The Debt Snowball method will help you beat your debt sooner than most people. It’s based on the same premise as paying off your debts with a credit card – pay off the smallest balance first so that you can get the snowball rolling more quickly and easily.
For instance, if you owed $3000 on a car loan at 13% interest, $5000 on a credit card with 18% interest, and $2000 in student loans at a 7% interest rate, you would pay off the car loan first, and then use the money that was going toward your car note to help pay down the credit card. This same snowball method can be applied to any sort of debt – just start with the smallest balance whether it’s a credit card or small installment loan like a student loan.
This method of paying down your debts will help you get out of debt faster than following the more traditional method of paying off your largest debt first. The reason is that it helps to build momentum, and once the snowball starts rolling it’s easier to keep growing as you pay off each smaller balance.
6. Make sure you are in a good place to be able to handle repaying the loans
This sounds simple and obvious, but this is a big deal. If you’ve lost your job or are in any other way struggling to pay the bills, then you need to be sure that you can get out of debt before taking on more.
Get advice on how you manage your finances, an
d don’t take on debt if you can’t manage it. If you’ve got a low income or an irregular income, then the situations where taking out loans might be useful will be very limited.
In general, no one should ever have any unsecured debts – like credit cards or personal loans – that they can’t repay in a month or two. For most people, the minimum income required to maintain this sort of debt is about $2000-$4000 per month (after taxes). If you’re earning $1000 per week and paying out around $400 on rent/mortgage, then it’s just too big a debt. You don’t want to ever get into situations where you’d have to choose between feeding yourself and keeping your house warm or paying back a credit card debt of $5000.
If you’re in this situation, then get your personal finances in order before taking on any new debts, because if you don’t do that first, then getting out of debt is going to be really difficult.
7. Don’t hide from or ignore creditors
Contact your creditors about debt problems; they are more likely to work with you if you contact them first. Keep records of all communications with creditors, including any promises made by the creditor to help reduce your bill or negotiate a payment plan, and report back regularly on your progress.
If you can’t pay your bills on time, creditors may be willing to set up a payment plan giving you more time to work out a solution (you’ll have to repay the interest that has accrued). If you’ve got no income at all and are behind with your rent and mortgage payments, ask for an adjustment. That is, contact the landlord or mortgage lender and explain that you don’t have enough money to make repairs or pay your regular monthly payment. Your creditor may work out a plan with you, depending on the circumstances. If not, ask about whether you qualify for any government programs.
You can contact the IRS and state tax agencies about debts that are more than $10,000. The Internal Revenue Service is authorized to collect taxes through wage garnishment (up to 25% of disposable income) and property seizure. The Internal Revenue Service will negotiate how much you can pay each month; if your income situation changes, contact them immediately and/or get professional help.
Not all creditors are willing to negotiate payment plans, but you should contact them anyway: if nothing else, it will make a big difference in how soon they decide to sue you. If your creditor files a lawsuit against you for nonpayment, the court may give you additional time to pay so long as you are trying to work out a plan with the creditor.
If you can’t pay what you owe, talk directly to your creditors. You’re more likely to get help if they don’t need to take further action against you, such as repossessing your property or selling it at auction and suing you for the balance.
8. Don’t be afraid to charge what you can afford on your credit cards and pay them off regularly.
Don’t be afraid to charge what you can afford on your credit card. Charge only what you can afford to pay. This is a basic principle of debt management that will allow you to make use of the available funds in your own pocket without any worry about overreaching yourself or borrowing more than you should borrow.
If you use this principle of charging only what you can afford, you’ll begin to see your debt packing away as a result. Take note of the figures that you charge and pay accordingly. You might be surprised how fast your debts will go away if you do this.
If you start feeling out of control with regards to your credit card debts, then the best thing you can do is call your lender to discuss your situation. Most credit card companies are willing to work with their customers’ individual needs when they call and talk about their financial situations. However, don’t be afraid to ask for more time to pay and lower interest rates if that’s what you want to.
You need not go into debt if you examine your priorities and how you are managing to live. You can either decide to cut back on what you spend or find a way of earning more. There is no need to let debts drag down the rest of your life.
9. Stop using the same card for all your purchases, if possible, so you aren’t carrying a balance from one month to the next.
If you’ve got several credit cards, it’s a good idea to use one for only one type of purchase. That way, when the bill comes due every month, you’ll get a better handle on how much money you can actually afford to pay before interest charges are added in.
When you’ve made your purchases, pay off the balance in full every month to avoid interest charges on what you spent. One strategy is to choose one credit card and use it only for gas or groceries. When the bill comes due, pay it in full before using it again. If you don’t have enough cash on hand to cover the bill, you’ll have to use a different card for that month’s spending.
If your paychecks are spread out over three months, but your bills come due in two-month installments, you may be able to make this kind of plan work. You might charge groceries and gas on one credit card and other purchases on another that have a lower interest rate. When the bill comes due, pay off the card with the higher interest rate first and then use that card for your groceries and gas again in another month.
10. You can make a budget using zero-sum budgeting techniques.
Once you have all your money and finances in order, you can start adjusting monthly expenses to keep up with any changes. My idea behind zero-sum budgeting is that at the end of the month there should be no extra money leftover—it will all go towards bills. If I’ve used up my funds for entertainment or food expenses, I can’t spend money on other things. My budget will be a zero-sum budget.
The idea is to help people with debt and no savings see how much they can save, by setting their goal to have $1,000 in the bank while paying off their debts.
Have you heard of the “how to get out of debt” advice that you first have to pay off all of your credit cards before you tackle any other debts? That’s true—if you are in some kind of trouble that goes beyond a little bit of late/missed payments, but the good news is that if you take care of those issues, then getting rid of your debt shouldn’t be an issue.
If it takes a couple of months or a few years to pay off your credit cards, don’t worry. It’s not worth going into debt again to get rid of them early.
If you’re only missing payments by a few days or a week or two (especially if it’s just the minimum payment due), you can usually call the credit card company and make a payment arrangement so that you can pay off the entire balance later with a payment plan.
If you are looking to get out of debt, the first thing that should be on your mind is addressing any issues with your credit cards and loans. If there’s a way for you to make payments or work out a payment plan–even if it takes longer than you expected–do so before trying anything else. Once this step has been taken care of, then it will be easier for you to pay off other debts and save money in general by avoiding interest charges and compounding fees from late payments. It can take time (sometimes years) to rid yourself completely of all debts, but don’t worry about rushing things just because they’ve piled up quickly!
How long does it take to get out of debt? That’s a question that many people ask. The answer is entirely up to you and your financial situation. If paying off an individual bill, credit card or loan becomes too challenging, then stop what you’re doing and regroup. Focus on smaller expenses or divert some money towards other goals (like retirement or an emergency fund). These are all good things to do–and they’ll also set you up for success when it comes to getting out of debt.