Paying off debt is never easy. Credit card debt, car loans, and student debt all add up and can be challenging to pay off – especially if you have a low income. If you’ve found yourself with debt on a low income, here’s a step-by-step guide to paying off that debt for good and improving your personal finances. In addition to the guide below, you’ll also find debt consolidation options for low-income earners.
Steps You Can Take to Pay off Debt on a Low Income
Paying off debt on a low income is challenging, but if you follow the six steps below, you’ll be well on your way to becoming debt-free.
Step 1: Tally up Exactly How Much Debt You Owe
When you’re deep in debt, it can be tempting just to ignore your bills and keep making your minimum payments. But this is a recipe for disaster because you can’t start paying off your debts if you aren’t even sure how much you owe and to whom. When you have a low income, every dollar that you’ll send toward paying off your debt counts, so it’s essential to know what you owe.
Start by making a list of your debts. Include the names of the creditors, the type of debt (such as credit card or car loan), the interest rate, and the balance remaining. Listing out your debts will help you prioritize which one to pay off first while making the minimum payments on the others to protect your credit score.
Step 2: Stop Accumulating New Debt
Before you can begin the process of paying off your debt, you need to stop accumulating new debt. Sit down and take a hard look at your finances to determine why you have this debt in the first place, so you can take the necessary steps to stop accumulating more.
Did you recently purchase a new car? In that case, your debt is likely a one-time thing. But if you’re consistently spending more money than you earn each month and relying on credit cards or payday loans to make ends meet, you need to change your habits to stop accumulating new debt.
Step 3: Choose How to Tackle Your Debt
Once you’ve added up your debts, it’s time to formulate a plan for paying them off. If you’re paying off debt on a low income, every dollar counts, so it’s essential to pay off your debt in the most efficient way possible. Consider listing your debts from the highest interest rate to lowest, and tackle the debt with the highest interest rate first. The debt with the highest interest rate costs you the most, so it should be dealt with first.
Another method to pay off your debt is to pay it off from the lowest balance to the highest. This strategy gives you the psychological bump of the “quick wins” of eliminating your debts quickly, but it may not be the most efficient way to get out of debt.
Step 4: Make a Budget and Stick to It
Once you know which debts to tackle first, you’ll need to figure out just how much you can afford to send toward your debt payments every month. You can accomplish this by setting up a budget that accounts for how much money you earn in a month and your monthly expenses like rent and groceries. Whatever is left over is how much money you can afford to pay towards debt payments.
The critical part of personal finance is that you stick to your budget and avoid overspending. The easiest way to ensure you stay on budget is to track your spending, either with a pen and paper or using online software. When you track your spending, you can ensure you don’t overspend on discretionary items like dining out or new clothing.
Step 5: Find an Additional Source of Income
If you’ve taken the steps above and found out that even with a budget, there is little or no money to send towards paying off your debt, don’t worry – you aren’t alone. When you are living on a low income, it can be challenging to scrape even a few dollars together to pay off debt. If this is the case, and you can’t reduce the expenses in your budget anymore, you’ll need to take the step of increasing your income.
An additional source of income could come in a few forms. It could be overtime or extra shifts at your current job. If that’s not an option, you could take on a second job or start a side hustle. Side hustles like driving for Uber or walking dogs are a smart choice to make extra money because they are flexible and you can work as little or as much as you like. Whatever you choose, make sure you earmark any additional cash you earn for debt payments.
Step 6: Explore Debt Consolidation Options
If you have more than one type of high-interest debt (for example, credit card debt), then you should explore whether a debt consolidation loan makes sense for your financial situation. Debt consolidation is the process of combining multiple debts into a single loan with a lower interest rate. The benefit of a debt consolidation loan is that you’ll lower the overall interest rate of your debts, and only have a single monthly payment – which some find more convenient than making multiple payments on multiple debts. Managing a single monthly payment could help you get out of debt easier.
Debt Consolidation for Low-Income Earners
If you have a low income and are interested in debt consolidation to reduce the cost of your debts and add convenience, you have several options. Below are just some examples of debt consolidation options for low-income earners.
Balance Transfer Credit Cards
A balance transfer credit card is a credit card that lets you transfer a balance from another credit card. Balance transfer credit cards usually offer a very low-interest rate (as low as 0%) for a promotional period (usually six months). If you have a small amount of credit card debt to pay off, transferring a balance is an excellent way to avoid interest charges and dedicate all of your money to paying off the debt principal.
There are a few downsides to a balance transfer credit card. First, if you don’t pay off the entire balance by the end of the promotional period, the remaining balance will be subject to the credit card’s regular purchase interest rate. Second, if you have a low income, you may not qualify to take on the additional debt of a second credit card.
Debt Consolidation Loans
Debt consolidation loans are personal loans that advance you a lump sum of money that you can then use to pay off your various debts. You’ll pay back your debt consolidation loan with a monthly payment over a set number of months or years. If you have a good credit score, debt consolidation loans are a good option and have the benefit of lower interest rates and a fixed payments schedule. If you're worried that your credit score is too low, there are ways to get a debt consolidation loan with bad credit.
Low-Interest Credit Cards
Finally, the third option for debt consolidation is a low-interest credit card. These cards offer interest rates not quite as low as the two options above, but still lower than a standard credit card. If your debt is primarily made up of credit card debt, moving your debt to a low-interest credit will save you on interest charges and help you pay off your debt faster.
Work Your Way Towards Being Debt-Free On a Low Income
It’s not easy to get out of debt, and paying it off on a low income adds extra complexity. When you have a low income, the strategies above will set you on the path to debt freedom. If you need additional help, a debt consolidation loan is an excellent way to speed up the process and lower the overall interest you’ll pay. By following the steps above, you’ll put yourself on the path to debt freedom, and with consistency, you’ll eventually find yourself debt-free. If managed properly, debt consolidation can also help you improve your credit score.
To find the best debt consolidation options available, sign up for Borrowell today. Get access to your free credit score, and see what types of debt consolidation loans, balance transfer credit cards, and low-interest credit cards you qualify for based on your credit score and financial background.