9 Tips To Get out of Debt When You Have Bad Credit

Bad credit and debt often go hand in hand. When you have overwhelming debt, it’s hard to maintain a good credit score. Bad credit also makes it difficult to access solutions like debt consolidation loans. For many debtors, this can seem like an endless cycle but it’s still possible to get out of debt.

If you’re wondering how to get out of debt with credit, we have several effective solutions in this guide, such as debt settlement, debt management plans, and no-cost options you can use to get out of debt.

What Is a Bad Credit Score?

A FICO score of less than 580 is classified as a bad credit score. FICO scores range from 300 to 850 and are the credit scores used by most lenders. VantageScore is another credit scoring model with the same credit score range.

Here’s a deeper look at different credit score ranges and what they mean:

Consequences of Bad Credit

Bad credit indicates to lenders that you probably have too much debt and trouble repaying it.  The three major credit bureaus (Experian, Equifax, and TransUnion) determine your credit score based on a number of factors, such as your payment history, length of accounts, credit mix, and age of accounts.  

If you have maxed out credit cards, late payment fees, collections, or other derogatory marks on your credit report, it’ll be difficult to qualify for most types of loans from traditional banks. This includes debt consolidation loans, which can help you get out of debt. 

Without access to better interest rates and loan products that make repayment easier, it can be difficult to find ways to pay off your debts.

9 Tips To Get out of Debt When You’re Struggling With Bad Credit

Regardless of how low your credit score is, there are always steps you can take to ease the burden of debt.

“The key to getting out of debt with bad credit is to come up with an action plan for how you're going to get out of debt,” says Teresa Dodson, debt expert and founder of Greenbacks Consulting. “Then you can begin to rebuild your credit. You can never improve your credit score with bad debt over your head,” says Dodson. 

Consider the tips on how to get out of debt with bad credit we’ve listed below:

1. Negotiate With Creditors

If you are behind on your payments on credit cards or unsecured debts, you can negotiate a settlement on your own. A DIY debt settlement may not be for everyone because it involves assessing your debt, knowing your rights as a borrower, determining how much you can pay, and convincing your lenders to accept your offer.

Start by reviewing your debt and determining how much you can settle your debt for. Approach your lender or debt collector and negotiate. While it can be difficult, you may be able to save a considerable amount of money if you’re willing and able to save up the settlement amount.

2. Consider Debt Consolidation

If you have high-interest debt from multiple sources, such as personal loans and credit cards, debt consolidation allows you to streamline them into a single, convenient monthly payment. You’ll usually require a credit score of at least 670 to qualify for the best interest rates. 

The average personal loan interest rate is 22.20% for borrowers with bad credit. Debt consolidation will only make sense if you’re paying much higher interest rates on your current credit cards, personal loans, or payday loans. Balance transfer credit card is another option, but only borrowers with excellent credit usually qualify for it.

3. Consider Debt Settlement

Debt settlement allows you to settle your debts for much less than you owe. If DIY settlement is not for you, consider hiring a company to negotiate on your behalf. You may be able to save up to 50% on your debts.

While collection agencies and lenders are not obligated to accept your offer, they’ll be more likely to accept if you’re already three to six months past due on loan payments and they don’t believe you’ll be able to repay. Keep in mind that other than the fees you’ll pay the debt settlement company, you’ll also owe taxes on the forgiven amount.

4. Explore Debt Management Programs

Debt management programs are also a good option for those with bad credit because they don’t require you to take out a loan or credit card. A nonprofit credit counseling agency can evaluate your debts and enroll you in a program if they determine it’s right for your financial situation.

You’ll make a single payment to the agency each month, and they’ll distribute it to your lenders. They may also be able to work out lower interest rates and eliminate late fees and penalties.

5. Consider Bankruptcy

If you need financial help immediately with bad credit and have exhausted all other options, consider filing for bankruptcy. In some cases, it may be the wisest option.

Your credit score will plummet, but you’ll get immediate protection from debt collectors through an “automatic stay.” Bankruptcy stays on your credit report for ten years, and it’ll be difficult to qualify for new credit, but you’ll get a fresh start.

Unless you have a regular source of income and can commit to a repayment plan of three to five years, Chapter 7 may be a better choice than Chapter 13.  

6. Look for Credit Card Debt Forgiveness Programs

Credit card debt forgiveness programs involve the credit card issuer forgiving a portion of your debt. It’s not likely that your lenders will forgive the entire amount, but you can get some relief if they accept a lump sum payment lower than your entire debt and forgive the rest.

For example, if you owe $8,000 on your credit cards and have missed payments for the last six months, the credit card issuer or collection agency may accept a lump sum amount of $5,000 and forgive the remaining amount.

7. Consider Bad Credit Lenders

If you’re considering refinancing or consolidating your debts into a single loan, consider working with lenders that offer bad credit personal loans. If you have a regular source of income and a low enough debt-to-income ratio, you may be able to get a loan. These lenders specialize in working with borrowers with less-than-desirable credit so that qualifying will be easier.

We recommend these three lenders for bad credit loans:

Online lenders typically have more lenient qualifying criteria. However, it’s best to check the loan terms carefully and compare your loan options before you sign the loan agreement.  

8. No Cost Options To Get out of Debt

Other than the options listed above, you can also get control of your finances by creating a budget and reducing your expenses. It’s a good first step to determine how much you owe, how much you earn, and if you can free up some money in your budget to speed up debt repayment.

Your budget may highlight areas where you may be able to cut expenses, such as unnecessary subscriptions, dining out, and other discretionary expenses. You can also find ways to increase your income by freelancing or starting a part-time job on the weekends. Any extra money you earn should be paid toward your debt, so become debt-free sooner.

9. Get Professional Credit Counseling

A nonprofit credit counseling agency can review your financial situation, help you make a budget, and create an action plan to get out of debt. Sometimes, all you need is a little guidance from a trusted professional to kick-start your debt repayment journey. A credit counselor can also help identify issues that you need to address to become and stay debt-free.

Take Action To Get out of Debt With Bad Credit

Having bad credit and debt creates a cycle where higher rates make borrowing more expensive, which stretches your limited budget, making repayment more difficult.

The tips we discussed in this guide can help you get out of debt when you have bad credit. We also recommend getting help if you feel you can’t overcome the challenges of having large debts. Once you repay your debt, you can also work on improving your credit through on-time payments, keeping your credit utilization low, and using credit responsibly.