If you're struggling to pay down debt, you're not alone. The total non-housing debt across America — including credit cards, student loans, and personal loans — hit $4.71 trillion in the second quarter of 2023, according to the latest Federal Reserve Household Debt and Credit Report.
Paying off debt can feel like a never-ending task, especially if you have a significant amount of it and bad credit. But the good news is that it's possible to reduce debt — quickly, in some cases — and ultimately pay it off. Plus, doing so can improve your credit, making it easier to avoid the debt trap going forward.
1. Assess your debt
To devise an effective repayment plan, it’s important to understand your entire debt situation. Review your billing statements, to start. Note the total amount owed on each account and the interest rate charged, as well as the minimum monthly payment. Having this sheet as a reference will help you when implementing one or more of the debt payoff strategies below.
Next, check your credit reports to make sure you didn’t miss any accounts with an outstanding balance. You can request free weekly credit reports from all three credit bureaus — Equifax, Experian, and TransUnion — by visiting AnnualCreditReport.com.
While reviewing credit reports, analyze factors that may be contributing to your bad score, such as late payments or accounts sent to collections. If you find inaccuracies, dispute them with the respective credit bureau — doing so could potentially boost your score and protect you from fraud.
2. Make a budget and reduce expenses
Create a budget if you don't already have one to find cash to pay down debt. List all of your expenses and income. Then, find areas you can cut back in, like eliminating or downgrading subscriptions, and eliminating food deliveries or eating out less.
Review your budget to see where you're spending the most. That can also inform your next steps. For example, if all your money is going to debt payments, prioritize debt consolidation or a debt management plan (DMP). If you have a high car payment, see if it’s possible to downgrade to a more affordable vehicle for a lower payment.
3. Consider credit counseling
If you need assistance creating a DMP, contact a nonprofit credit counseling agency. These companies often offer free credit counseling. They can also negotiate with creditors on your behalf to set up a debt management plan, in exchange for a one-time and monthly fee. With these plans, you make a monthly lump-sum payment to the agency, and it uses those funds to pay your creditors. DMPs typically last three to five years.
One downside to a DMP is that you may have to pay a monthly fee, such as $33, plus an initial setup fee, such as $75. Note that the agency may not allow you to open new credit accounts while enrolled in the plan. Plan to share your debt assessment and budget with your credit counselor to streamline the process.
4. Debt consolidation for bad credit
Even with bad credit, it can be possible to qualify for a debt consolidation loan. Debt consolidation is when you use a loan, like a personal loan, to pay off your existing debt. A debt consolidation loan replaces multiple debt payments with a single monthly payment, which can save you money on late fees and be easier to manage. Plus, it gives you an end-date for when your debt will be paid off.
Ideally, the annual percentage rate (APR) on the loan is lower than the net APR you’re currently paying on all your debt. But it doesn’t have to be. If you’re able to consolidate at a rate equal to the APR you’re currently paying, you could pay off the debt in the same amount of time, but have fewer accounts to manage.
Plus, you could improve your credit score almost immediately, especially if you’re consolidating credit card debt. This is because your credit report will show multiple accounts successfully paid and your credit utilization ratio could drop dramatically if you keep the cards open.
Tip: Credit utilization makes up 30% of your credit score.
To find the best debt consolidation loan, prequalify with multiple lenders to get an estimation of the rates you’ll qualify for. Prequalification doesn’t hurt your credit score, and is not an offer of credit.
Once you apply, the lender will conduct a hard credit pull, which could temporarily lower your score — usually by no more than five points and for no longer than one year.
Learn More: Does Applying for a Loan Hurt Your Credit Score?
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
5. Negotiate with creditors
Contact your creditors to negotiate lower interest rates on your existing debt. It’s not guaranteed to work, but your creditors would prefer to be repaid some of the money you owe rather than none at all. Detail your situation and be prepared with a monthly payment amount you can afford, a payoff timeline, and the balance you’d be repaying under that scenario.
Use a debt calculator to work out what makes sense for you. Just know that settling debt with creditors can damage your credit score, as debt charge-offs show up as negative items on your credit report. In addition, you may have to pay taxes on the amount of forgiven debt.
You can hire a third party, like a debt settlement company, to negotiate for you, but that can have additional drawbacks, including debt settlement fees, late payments on your credit report, and settlement offers not working.
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6. Increase your income
Often easier said than done, but increasing your income is one of the best ways to get out of debt. One of the simplest ways to do this is to leverage assets you already have. For example, if you have spare time (say, in the evenings) and a vehicle, consider a driving gig transporting riders or delivering food or groceries.
Another way to leverage existing assets is to sell ones that you don’t need. A garage sale is one example of a tried and true way to make hundreds or thousands of dollars over the course of a weekend and clear out clutter at the same time. The key to increasing your income is to identify your resources and get creative.
Most importantly, use your newfound funds to pay off your debt. Pay down the account with the highest interest rate, or pay down the smallest amount you owe — refer to your debt assessment sheet. The first approach is similar to the debt avalanche method, the second, the debt snowball.
How to improve your credit score
You can take several steps to build good credit:
Learn what factors affect your credit score
These are the factors that influence your FICO score:
- Payment history: Repaying your debt and other bills on time accounts for 35% of your score.
- Credit utilization: How much debt you owe compared to your overall credit limit accounts for another 30%.
- Length of credit history. The average age of your credit accounts make up 15% of your score.
- New credit: How often you apply for new credit accounts represents 10%.
- Credit mix: Whether you have different types of credit accounts — a credit card and a mortgage, for example — also plays a role, making up 10% of your score.
Consider credit-building products
Some lenders offer products designed to help you build credit, such as a secured credit card or credit-builder loan.
- Secured credit card: A secured credit card requires a deposit that establishes your credit limit — which may be the amount you deposited or less. The credit card issuer generally reports your payments to the three major credit bureaus
- Credit builder loan: Credit-builder loans operate differently than traditional personal loans. Instead of receiving the loan amount upfront, a lender puts the funds in a locked savings account or certificate of deposit (CD). You then make payments over a set period — say 12 months — after which, you’ll receive the money minus interest and fees. Like a secured credit card, the lender reports your payments to the credit agencies.
Check Out: How To Build Credit
Monitor your progress and practice good credit behavior
To track your progress, use the free credit reporting service offered by your credit card issuer or loan provider. If your lender doesn't offer one, you can use a free credit scoring website.
Although improving your score won't happen overnight, practicing good credit-building behaviors, like paying bills on time and keeping your credit utilization low, can help you build a stellar credit profile.
FAQ
Can I consolidate debt with bad credit?
Yes, debt consolidation loans for bad credit are available. Although, getting approved for a debt consolidation loan with bad credit may be challenging.
Note that, if approved, a lender will likely charge a high APR, or you may need to apply for a debt consolidation loan with a cosigner. You might also consider using a home equity loan to consolidate debt, if you have home equity. Just recognize that missing payments could potentially result in foreclosure.
What are effective ways to rebuild my credit score while paying off debt?
One of the best things you can do to rebuild your credit is to make on-time payments. Doing this can help you add positive payment history to your credit reports, potentially improving your score.
Another important step is to focus on lowering your credit card balances — doing this can decrease your credit utilization ratio, which accounts for 30% of your FICO score.
Are there debt relief programs specifically for people with bad credit?
Yes, credit counseling agencies work with people with various credit profiles, including bad credit. You can visit the National Foundation for Credit Counseling to find certified credit counselors in your area.
Read More:
- How To Get Approved for a Personal Loan
- Ways To Improve Your Personal Loan Application
- Ways To Pay Off Debt Fast
- How Debt Consolidation Helps Your Credit
- Pros and Cons of Debt Consolidation
- Types of Debt Consolidation Loans
- Debt Consolidation vs. Balance Transfer
- Best Debt Consolidation Loan Rates
- Best Debt Consolidation Loans for Fair Credit
