Paying off debt can be challenging regardless of how much money you have. When you're on a low income, debt can be like a trap that is impossible to escape from.
The Federal Reserve Bank of St. Louis found that the lowest-income households have credit card balances equal to 85% of their monthly income. Debt on that magnitude can be overwhelming, but there are steps you can take to pay it off.
Budgeting When Money's Tight
Think of a budget as a spending plan that lets you see where your money is going. When you have a plan, you will be able to manage your finances more efficiently.
To start, list:
- All sources of income
- Fixed expenses like rent and car loan payments
- Variable expenses like groceries and utilities
Then subtract your necessary expenses from your income. What you have left should go towards discretionary spending, savings, and debt payments.
Avoid New Debt
To get out of debt, you have to stop spending on credit. Put your cards away. Freeze all unnecessary spending. Find a way to make do with the money that you earn.
Buying things with your credit card delays payment and means that you will have to pay interest. Credit card interest rates are high, and a big reason people find themselves trapped in debt.
Negotiate with Creditors
Reach out to your creditors; you may be surprised by how much they're willing to help. Many offer hardship plans or income-based payment plans. You can also request lower interest rates or for fees to be waived.
If you're behind on payments, creditors may also be willing to accept a settlement. Debt settlement is when you or a company negotiates to pay less than you owe. While this can reduce your balance, it will harm your credit and may result in tax liability on the forgiven debt.
If you're considering a settlement, do your research and ask questions like, "Is National Debt Relief legit?" There are plenty of scams out there. Always check reviews and verify credentials at nfcc.org.
Try DIY Debt Relief
Debt relief refers to any method that makes it easier to pay off what you owe. Most people think of debt settlement. Before you go that route, try paying off debts yourself.
Debt Snowball Method
The snowball method focuses on paying off the smallest balance first, while making the minimum payments on all accounts. When you pay the smallest account off, dedicate all the extra dollars to paying off your next-smallest balance. As you pay down debt, the available money snowballs into larger amounts.
The snowball method yields quick wins and can motivate you to keep moving forward. It can also be costly, as your balances will continue to grow, and those may have higher interest rates.
Debt Avalanche Method
The avalanche strategy works similarly to the snowball. You make minimum payments, but put all your extra income towards the debt with the highest interest rate first. After you pay off that account, move on to the debt with the next-highest interest rate.
You will save money on interest, but it often takes longer to achieve a win. Select a method or a combination of strategies that motivates you to keep going.
Get Help with Debt Relief
Paying off debt on your own can be a challenging task. There is no shame in seeking help.
Debt Consolidation
Debt consolidation is when you roll multiple debts into one. The goal is to simplify your finances and lower your monthly payments.
You can take out a new loan and use the funds to pay off creditors. Debt consolidation loans typically have fixed monthly payments and lower interest rates than credit cards.
If you have good to excellent credit, apply for a balance transfer card with an introductory 0% APR offer. If you pay off the balance before the promotional period ends, you won't pay any interest.
Debt Management Plan
Debt management plans (DMPs) are offered by nonprofit credit counseling agencies. They consolidate your unsecured debts into one monthly bill, often at a lower interest rate. You pay the agency, which distributes the money among your creditors.
Bankruptcy
Bankruptcy is a last resort, but for some, it's the best path forward. Chapter 7 wipes out most unsecured debts quickly, but you have to pass a means test to qualify. With Chapter 13, you pay debts over time through a manageable repayment plan. The right choice depends on your financial circumstances. Consult a lawyer before making a decision, as bankruptcy will severely damage your credit.
Earn Extra Money
Increasing your income can make a significant difference in paying off debt. Ask your employer for extra hours or look for a part-time job. The gig economy offers numerous opportunities and flexible hours. You can find a side hustle that fits your skills and schedule. Any extra money you earn should go directly towards paying off debt. Every dollar counts, and these small efforts can add up over time.
Government & Nonprofit Assistance Programs
Help is out there if you know where to look.
- SNAP (Supplemental Nutrition Assistance Program) gives funds for groceries.
- For heating or cooling bills, LIHEAP offers utility assistance.
- Health coverage may be available through Medicaid or ACAsubsidies at gov.
These programs exist to support you, not judge you. Use them to lighten your financial load.
Final Thoughts
Paying off debt when you're already struggling to make ends meet is hard, but you can do it. Get a handle on your debt sooner rather than later, so it doesn't spiral out of control.
Try to tackle debt on your own first by negotiating a payment plan or implementing a DIY method. If this doesn't work, seek out help. Credit counselors can enroll you in a DMP and offer free guidance on creating a realistic budget.
Take the first steps today to start paying off what you owe.
