How to Get Out of Debt on a Low Income

Debt happens to the best of us. Emergencies—like car or home repairs that you can’t predict—or an unexpected injury can crop up when you're least prepared for them. Then there are little indulgences that can come back to haunt you long after the fun is a mere memory. Debt can be a tough pit to climb out of, especially when your bills outpace your salary.

Nonetheless, it's well within your power to gain control of your finances. When managing debt, what you need most is strategy and discipline. Here are some ways to rein in your debt.

Debt Consolidation

When you’re deep in debt, just keeping track of what amounts you owe to whom can be challenging. Combining your credit card bills via debt consolidation not only simplifies things by having just one payment but ideally, you’ll cut costs by reducing the interest rate and lowering monthly payments.

You can consolidate your debt either by qualifying for a bank loan or signing up for a debt management program where there’s no loan. Do your homework to see which option is best for you.

However, debt consolidation does have its downside. First, it could tie you to your debt longer. Second, if you don’t change bad habits and apply for more credit cards you’ll soon be back in trouble. You'll also want to be mindful of how you consolidate—you don’t want to mix high-interest debts in with your low-interest debts, as this will raise the interest rate on a larger sum of money. Instead, consolidate to two separate loans or just consolidate the lower-interest-rate loans together and continue paying off the higher-interest rate loans by themselves.

Debt Settlement

Do you have a huge outstanding balance on a credit card that seems like it's never going to get paid off? Are you only able to pay minimums, or worse, been spotty about making the minimum payment itself? If you've found yourself in this situation, it's likely you've received a letter, out of the blue, from your creditor, offering you the chance to settle your debt for less than you owe, and likely, much less, perhaps 30-70%. Is it too good to be true?

Settling for less than you owe has a lot of appeal. You'll be able to free up cash flow since your monthly payment will typically be less than what you might have been paying out. Once you begin the debt settlement process and your debts are being paid off, your credit score will begin to rise. This is because your credit utilization will be decreasing and having a debt listed as “settled” on your credit report hurts your score less than having a delinquent account.

But there is a "gotcha"—tax implications. The portion of your debt not paid back is counted as taxable income and you will have to pay taxes on that amount. If it’s a large sum, you may owe substantial federal and state income tax. A settled debt can also remain on your credit report for seven years. However, future creditors will see that you took the initiative to settle the debt and they make take that as a favorable sign that you will be responsible moving forward.

Come Up with Extra Cash

When you’re on a mission as serious as managing and paying off your debt, you need financial reinforcement—just relying on your paycheck won’t suffice. Vow to generate extra cash. Make use of any special skills you have, like playing the piano, organizing spaces or writing. Consider opportunities like ridesharing, doing food delivery, or tutoring online (many parents need help with homeschooling). Take inventory of your household as well—there's likely an abundance of treasure that can be sold on eBay or elsewhere.

You can also consider becoming a personal shopper. Get familiar with stores so you can get in and out as painlessly as possible and capitalize on the hours you shop. Any bonuses or overtime you make should be dedicated to debt.

Cut Expenses

Sometimes you have to do the hardest option—taking a hard look at your expenses and making painful cuts. Think about your necessities—everything else can come second as you work to pay off your debt. Work hard at trimming your grocery bill, reducing the number of times you order takeout or dine out during the month. Rethink your subscription services. Can you do better with another cell phone provider? Once you’ve paid off your debt, you can breathe a little easier and incorporate some old staples back into your life, but with moderation. If you keep expenses low, you’ll have more money to sock away for emergencies, so you don’t find yourself spiraling into debt again.

Be Payoff Savvy

Strategy counts. You can’t be willy-nilly in attacking your debt. You can come up with a plan of your own or go for commonly used techniques such as paying off your highest interest credit card first or the card with the highest balance.

If you want to focus on paying off your highest-interest credit card or card with the highest balance first, make sure you're paying more than the required minimum monthly if you can. For your other cards, you can continue to pay the minimum until your highest-interest or highest balance card is paid off. The mental relief that will come from slaying that dragon will propel you forward.

You can then move on to the next card with the highest interest or balance and employ the same tactics. Plug away and pat yourself on the back when the day comes when you’re down to zero and debt-free.

When the bills keep rolling in while your income stays the same, it's normal to feel powerless. But what matters most is not how much you make, but how you use it. You can make the most of what you have if you’re disciplined. You can recover from past mistakes and circumstances that were beyond your control if you’re willing to do the work. It comes down to character, and that has precious little to do with the size of your paycheck.