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How to Pay Off Debt When Having a Low Income

By November 23, 2022No Comments
Stressed woman holding her credit card

The process of figuring out how to pay off the debt burden on a budget isn’t an easy task. Although certain financial “gurus” recommend that you cut down on coffee and avocado toast, minor adjustments will likely not create a significant impact.

Reducing your expenses can assist; however, there are many alternatives, possibly more efficient actions you can adopt to reduce your debt. Here are eight steps you can consider, but bear at heart that the most effective approach to getting out of debt will depend upon your financial circumstances.

1. Stop taking on new credit

It can be challenging to accomplish if the monthly costs of your household are higher than your income, and it’s vital to avoid the prospect of a new loan if you’re having trouble paying your expenses. Making necessary charges on the credit card or obtaining the possibility of a personal loan you can’t pay off will make it more challenging to pay off your debt soon.

It is essential to stay clear of high-interest loans like payday loans, advertised as a means to individuals get by until their next payday. Payday loans do not require credit checks, which makes them attractive to those with low incomes — however, they offer triple-digit APRs and concise repayment terms (typically 2 to 4 weeks), making them hard to pay back.

Payday loans can trap people in an unending cycle of debt that’s hard to get out of.

2. Find out how much you have to pay

Before you tackle your debts, you must figure out the exact amount you must pay. Start at AnnualCreditReport.com, where you can get a free credit report from each of the major credit reporting agencies — Equifax, Experian, and TransUnion (Due to COVID-19, credit bureaus accept weekly credit reports). The information will show your credit card debts, and break them into the lender, loan amount, and credit balance, for instance.

Be aware. Your credit report might not contain all the debts you have to pay. Credit reporting agencies may only access information about the obligations and accounts. However, it’s an excellent starting point.

Also, you should collect your bills or log into your online account and note any amounts due, interest rates, minimum monthly payments, and names of your creditors. It is also possible to use an app to budget that allows you to log into your bank accounts and track the balances.

3. Set up an annual budget

With your debt list with you, start working on an annual budget to see the amount of money that goes to pay for minimum debts and living expenses and how much you make. It is possible to automate your budget using an application like the one above or create your spreadsheet for budgeting.

Think about using the budget method 50/30/20 to ensure your finances are in check:

  • Fifty percent of your earnings should go towards “needs,” like mortgage payments, food, and other necessary expenses.
  • Thirty percent of your earnings should go towards “wants,” like dining streaming services, dining out, and other forms of entertainment.
  • 20% of earnings should be used to pay off debt and savings, including retirement savings and an emergency savings account.

After you’ve recorded your take-home pay and the total amount, look at what’s left to be spent close to the current month. If you don’t have a surplus to repay debt, think about cutting your expenses within your “wants” category as much as possible. Suppose you can make it possible to spend more than 20 percent of your earnings towards savings and debt repayment to pay off the debt faster.

4. Reduce your expenses

To meet (or advance) your debt obligations, You may need to cut back on expenses in other aspects. Start by examining your most expensive expenditure categories, including rental and transportation.

If your car’s monthly payment isn’t enough, Consider, for example, switching to a cheaper car. If you’re stretching your budget with a high-priced apartment, consider shifting to a lower-cost home, or at the very least, until you can get a grip on the debt.

There could be some lifestyle changes you can implement to make extra space within your budget. Here are a few suggestions that might help:

  • Check for coupons or promotional coupons before making purchases
  • At home, cook and avoid eating out in restaurants
  • You can ditch your gym membership and instead exercise at your home or outdoors
  • Shut off any subscription service you’re paying for but not longer
  • Change your phone service to a cheaper service
  • Seek free entertainment options in your region, like free concerts or hiking in parks.

If you’re aiming to spend less, you may have to inform your loved ones and relatives about your plans. So, they’ll be able to help you through these lifestyle modifications, and hopefully, they won’t pressure you to spend more than you would like to when you gather with them.

5. Discover ways you can earn money

Saving money is only one aspect of taking charge of your financial situation. The other is making more money. If you have the time, consider ways you can make more money.

A few side hustles include working for a ride-sharing company and offering services on an online platform such as TaskRabbit or being a freelancer online. If you’re working full-time, you may want to seek a new job that pays a higher amount or an increase in the current position.

There are various methods to earn cash; you could make extra money to pay down your credit card.

6. Make use of the debt snowball or the debt avalanche technique

The debt snowball and the debt avalanche are effective methods to pay off debt earlier than scheduled.

Debt snowball

Build up the momentum to pay off your debts quickly using the debt snowball technique. This debt repayment method will allow you to pay off the smaller debts first, then knock out the more threatening balances before moving on to larger, more costly debts.

The debt snowball technique allows you to reduce your debt, as you begin with lower balances that can be paid back faster. With fewer debts to manage and pay off, debt repayment becomes much easier to complete.

Debt avalanche

The debt avalanche method first eliminates the highest-cost debts by focusing on the debts with the most interest rates. This will ensure you save the most on interest over the long term. If your most expensive credit cards have massive balances, It may seem like you’re not making progress initially.

If you’re struggling to pay off large debts, think about merging your debts with the help of a debt consolidation loan (more about this later).

7. Talk to your creditors about lower rates

If the interest rates for your debt are making it difficult for you to keep up, you may be able to bring the rates down. Contact those who owe you money to discuss a lower rate.

You will likely receive a positive response if you’ve made your payments over the years. You can mention that you’ve maintained your account in good standing when you submit your request.

If you can reduce the interest rate by a few percentage points, you’ll save the cost of your debt and could be able to pay it off faster.

8. Explore debt relief options

If you’re making more than you could and don’t have any more areas that need trimming, It could be the perfect time to consolidate your debt or consider other debt-relief options.

Here are a few of the most popular ways to reduce debt that you should consider:

  • Consolidation of debt
  • Service for counseling on credit
  • Settlement of debts
  • Bankruptcy

Consolidation of debt

It’s easy to skip payments and get lost in the expenses you incur when trying to manage multiple monthly fees. To help make the repayment process easier, consolidating your debt into one monthly payment is possible. Additionally, you might get the lowest interest rate and lower monthly payments and pay the debt off more quickly by consolidating.

Credit counseling service

Credit counselors typically work as part of non-profit organizations that assist consumers in establishing plans for managing their debts and money. Initial meetings with the credit counselor usually take place for free.

Credit counselors could assist you in creating a debt management program (DMP) to pay off your debts and reach an agreement between your lenders to put off collection actions and late charges while following the plan and restoring your credit following.

A DMP is typically 3 to 5 years, and your counselor might be in a position to negotiate lower interest rates or payments per month to make repayment more manageable. Be aware that DMPs aren’t for everyone. They may charge monthly costs that you should inquire about before signing up.

You can get a legal credit counseling services list at the U.S. Department of Justice.

Debt settlement

Settlement, also known as credit relief companies, are not-for-profit businesses that engage with creditors to resolve your debts in a lump sum that is less than the amount you have to pay. You’ll need to pay the debt relief firm a fee to allow them to bargain on your behalf.

But, generally speaking, it’s not a good option to partner with an organization dealing with debt because you’re paying for a service you can do yourself. You may be able to settle your debt by yourself, provided you speak to your creditors.

Although these firms can assist in settling outstanding debts, they have significant dangers. The debt settlement program advises you not to pay your debts on time, resulting in fees and negatively impacting deficit credit. Also, debts appear in the credit report and can harm your credit.

The CFPB and the Federal Trade Commission (FTC) caution consumers to use caution before paying a business to contract debt on their behalf.

Bankruptcy

In certain situations, filing for bankruptcy could be the only option to settle your debts and gain an opportunity to start over. If you’re losing your home or collection accounts, bankruptcy could be the best financial option. There are two options: Chapter 7 and Chapter 13 bankruptcy.

  • Chapter 7 bankruptcy: The assets you own are sold off to pay creditors, and the rest of your debts are paid off. This kind of bankruptcy can be on your credit report for up to 10 years.
  • Chapter 13 bankruptcy: The plan you create is the plan to repay the entirety or a portion of your debts and keep your assets. Chapter 13 bankruptcy will stay on your credit report for up to seven years.

To determine which option for bankruptcy is the most suitable for you, consult an experienced bankruptcy lawyer who knows the laws in your state. You can obtain the list of lawyers in your area by calling the Bar association in your location.

Extra tip: Don’t forget your emergency reserve

You don’t need to decide between paying off debt or saving. Setting up the process of creating an emergency account can be essential for getting rid of debt. Not having savings saved up in a disaster makes it easy to slip further into debt after one financial downfall.

Here are some tips on how to set up your emergency savings:

  • Make a list of your monthly expenses and start with a smaller amount. You should have a savings account covering your six-month essential monthly costs. It’s logical, to begin with, the aim to cover a month’s expenses first.
  • Set up recurring transfers as well as Direct deposits from your pay. Suppose you deduct a tiny amount of your paycheck directly into your emergency savings account. In that case, it will be added when you receive a stipend without thinking about it.
  • Make use of a savings account that is high yielding. Your emergency fund must be accessible and doesn’t have to be in cash or a checking charge. Savings accounts with high yields can permit you to accumulate additional interest to your emergency fund without penalty for withdrawal.
  • If you reach a savings or debt-repayment milestone, rejoice accordingly. You may bake dessert, take a stroll, and have a spa day at home.
Taylor Day