Figuring out how to pay off debt when you’re not earning a lot can be difficult. But if you follow the steps below, you may find that getting out of debt is possible, even on a low income.
The best way to get out of debt should start with knowing exactly how much debt you have.
Add up how much you owe
First, find the following numbers for each loan and credit card you have:
- Outstanding balance: The total amount you owe.
- Interest rate: What the lender charges you in exchange for loaning you the money. (When fees are included, it’s referred to as the “annual percentage rate” or APR.)
- Minimum monthly payment: The amount you must pay every month in order to avoid delinquency (being late on your payments).
You can find these numbers by logging into your online credit card or loan account. If you’re still getting paper bills, you’ll also see them on your monthly loan or credit card statement.
Add up your other expenses
Next, you’ll make a list of your expenses, or the things you spend money on every month. Avoid estimating these numbers — instead, get the exact amounts from your transactions from the last three months.
Make a list of:
- Fixed expenses. Things that cost the same amount every month, like rent or mortgage payments, gym memberships, child care payments and streaming services.
- Variable expenses. Costs that change from month to month, like groceries, transportation, clothing and entertainment.
For your variable expenses, add up how much you’ve spent over the past three months and calculate the monthly average. Then add the average to your fixed expenses to find out what you spend each month.
Tip: Make sure to include your monthly debt payments to your expense list.
Find your monthly income
Figure out how much you bring home every month after taxes. If you get a weekly salary, you can multiply it by four (or by two for a biweekly paycheck), which should give you the minimum amount of pay you would get in any given month.
Make a budget
In order to create a simple budget to pay off your debt, start with this basic formula:
Monthly income – (total monthly expenses) = Amount you can put toward debt each month
If you get a positive number for the amount you can put toward debt each month, great! You’re ready to move to the next step.
If you get a negative number, then you likely can’t afford your minimum payments. In this case, you should try the following:
- Cut your expenses: If you can, get rid of any unnecessary expenses from the list. For example, unsubscribe from streaming services or gym memberships that you don’t use. (See more ideas in our cost-cutting guide.)
- Explore ways to make more money: The gig economy has made it possible for people everywhere to make extra cash while holding down a full-time job.
- Look at alternative debt solutions: Consider ways to switch to a different form of debt, as discussed below.
For more tips on planning out your spending, check out our full guide to budgeting.
Look up your credit score
Finally, you’ll want to know your credit score in order to choose the right strategy to pay off your debt. You can get your credit score for free using LendingTree Spring, which also alerts you when there are any changes.
Step 2: Choose a strategy to pay off your debt
There are several strategies to pay off debt, and the best one for you will depend on your personal situation, based on the numbers from Step 1.
If your budget has room for extra debt payments, then consider some of the traditional debt solutions below. If you’re strapped for cash, however, skip down to “alternative debt solutions.”
Traditional debt solutions
You’ll always want to make at least the minimum payment for every debt you owe. But if you have extra money for additional payments, which loan or credit card should you target first? Here are two common strategies:
Debt snowball method
With the debt snowball method, you make any extra payments you can afford to the debt with the smallest balance. This will help you reduce the number of loans and other debts more quickly, giving you a psychological boost as you see the list get shorter.
Debt avalanche method
For the debt avalanche method, you focus any extra payments on whichever debt has the highest interest rate. This should save you the most amount of money over time.
A 2023 LendingTree study showed that both of these methods are effective, so choose the strategy that makes sense to you and stick to it until you’re debt-free.
Alternative debt solutions
Maybe your problem isn’t how to pay off debt faster but how to simply keep up with your debt payments. In this case, you may need one of these alternative debt strategies.
Debt consolidation loans
Debt consolidation loans are new loans that you take out to pay off current debts. If you’re able to get a lower APR than what you’re currently paying on one or more of your debts, then this could be a good move. (Try our debt consolidation calculator to see what you might save.)
In fact, there are also debt consolidation loans for bad credit, although you might have trouble finding one with a low enough interest rate to make it worthwhile.
Balance transfer credit cards
A 0% balance transfer credit card offers a promotional period — usually between 12 and 21 months — during which they won’t charge you any interest.
If you have good or excellent credit and can afford to pay off your debt before the promotional period ends, then a 0% balance transfer card might be the best option for you.
Home equity loans
If you own a home, you might be able to find a good interest rate on a home equity loan or “second mortgage.”
If you have a lot of equity in your house and want fixed monthly payments, then this might be worth considering. But beware: A home equity loan puts you at risk of losing your home to foreclosure if you don’t make your payments.
401(k) loans
A 401(k) loan borrows money from your own retirement plan. These loans can work for people with bad credit, since they don’t require a credit check.
Not all 401(k) plans allow for loans, and they’re usually only a good idea if you plan to stay with your employer for the foreseeable future. This is because if you leave or lose your job, you may have to pay the loan back immediately or else face a tax penalty.
Credit counseling
Getting credit counseling from a certified credit counselor can help you create a plan to tackle your debt. Your credit counselor might even be able to help negotiate lower payments or rates with your lenders.
However, you may need to pay a small fee to work with a credit counselor, and many credit counselors require that you stop using credit until your debt is paid off.
For more strategies and tips, see our guide to becoming debt-free.
If the options from Step 2 don’t work for you, you could also consider debt relief or debt settlement.
A debt settlement company negotiates directly with your lenders to lower your monthly rates, payments or even outstanding balances. You could then switch to making a single monthly payment to the debt settlement company until you’ve paid off your debt.
There are some downsides, however:
- Some debt relief companies are actually scams. Watch out for companies that charge fees up front (before you’ve settled your debt), that tell you to halt all communication with your lenders or that promise you a certain amount of debt forgiveness.
- Debt settlement can lower your credit score significantly.
- Debt settlement fees can be expensive.
- You might not resolve all of your debt.
Step 4: Stay out of debt
If you’re able to use the strategies above to become debt-free, your final step will be to stay out of debt as much as possible.
Avoid unnecessary spending. It happens to the best of us. According to a recent LendingTree study, 26% of Americans have gone into debt to purchase the latest tech. If this sounds like you, make it a rule to only spend on non-essentials when you can pay for them in cash.
Avoid taking out new loans unless you have a plan to pay them off. Sometimes debt is necessary, but a good budget can help you pay off your loan on time.
Pay your bills on time and in full every month. Late or missed payments can hurt your credit score and result in late fees, adding to the amount you owe.
Know the difference between good and bad debt. Good debt helps you achieve your financial goals, and it’s usually taken out on assets that gain value over time, like a home. Bad debt is for things you don’t really need. Also, avoid high-interest traps, such as payday loans, no matter what you borrow for.
Keep up with your credit. Your credit score is the key to your financial future. Try to improve your credit score whenever possible. A recent LendingTree study showed that raising your score from fair to very good could save you upwards of $22,000.
