Ways to Get Out of Debt Without Hurting Your Credit
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Being in debt can be a crippling feeling, especially if you're short on cash. (According to a recent LendingClub report, 64% of the U.S. population is living paycheck to paycheck.) The good news? Being in debt, even if it's "up to your eyeballs," is usually irreversible. Here are a few tried and true strategies to help you get out of debt.
In this article
How can I avoid getting into debt?
Falling into debt is easier than you think and much harder to get out of if you don't notice it in time. However, staying out of debt is doable if you stick to your guns and follow a few rules. Having an emergency fund, for example, is one strategy that'll keep you safe "just in case." Most people say it's good to have at least three to six months of living expenses saved up, but an emergency fund can really be as large or as small as you'd like.
Other money-saving strategies include budgeting your monthly expenses, limiting the number of credit cards you own, and living a modest lifestyle (cutting out the "wants" and only purchasing the "needs") — even if your paycheck says otherwise.
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How are credit scores calculated?
According to Equifax, credit scores are not created equally. Creditors use different types of scores based on their industry. So, if you're buying a car, the lender may use a score that focuses on your payment history and auto loan history and a combined score from the big three: Equifax, Experian, and TransUnion.
When calculating credit scores, some credit scores use additional data, such as a person's income.
In general, your credit score is determined by the following factors:
- the number of credit accounts you have
- the types of accounts you have
- credit utilization vs. available credit
- the length of your credit history
- your payment history
Credit score ranges
Credit score ranges vary based on the scoring model used (mentioned above) but usually follow this rubric:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
Ways to get out of debt
If you catch your debt before it gets out of control, you can dig your way out unscathed. Depending on the amount, you could try a DIY method before calling in the pros. Here are a few ways to get yourself out of debt before it gets you.
Find a new payment strategy and stick to it
This solution seems simple enough, right? However, finding a payment strategy that works for you and your budget can be complicated if you dive in without a specific goal. Before developing a plan, think: What's my end goal, and how can I get there safely and affordably?
Snowball method
The snowball method is a common repayment strategy where you focus on paying off your smallest balances first before moving on to the larger ones — like a snowball. It's all about building momentum as you pay things off, one by one.
To do this, make a list of your debts from smallest to largest. Then, each month, pay the minimum on each account except the smallest balance — pay as much as you can towards that one without putting your life in danger (e.g., you can still feed yourself and pay rent). Once the smallest balance is paid off, move on to the next-smallest balance (as you continue to make the minimum payments on your other balances). Continue the process until you're debt-free.
Avalanche method
Unlike the snowball method, the avalanche method focuses on paying off high-interest loans and balances first before paying off the smaller balances. By focusing on the more financially burdensome debts first, you'll be able to save money in the long run.
Note: If you crave instant gratification, the avalanche method isn't for you — this is especially true if the principal is large as it may take longer to pay the balance off. If you're looking for quicker, "more rewarding" results, you may want to try the snowball method first.
Autopay
Want to know the trick to never missing a payment? Autopay. Automating your payments to come out of your checking account each month is an easy way to stay on top of your debt and avoid potential fees. Bonus: Some companies reward customers who enroll in autopay at signup.
Pay more than the minimum
Credit card companies make money off of interest. So, if you only ever pay the minimum, they're cashing in on the interest — that's how they get you. With that being said, there's no rule against paying more. You can always opt to pay more than the minimum payment due.
Debt consolidation
If you can't figure out how to pay your balances off in a timely, affordable, and financially safe manner, it may be time to consider debt consolidation. Debt consolidation allows you to make one payment monthly while chipping away at that cumbersome balance.
This is a good option for people who can find a new debt with a lower interest rate than their current debt. Or in other words, this is a solution to "not making a dent" in your debt balance even though you're emptying your wallet into credit card bills each month.
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Personal loan
If you're deep in credit card debt, it may be easier (and more beneficial) to consolidate your debt with an unsecured personal loan or debt consolidation loan instead. This way, you'll be able to make one monthly payment (fixed interest rate) instead of several while seeing a noticeable decrease in your balance each month.
What's more? Some companies specialize in consolidating credit card debt and will send the funds directly to your creditors.
Balance transfer credit card
A balance transfer credit card is designed to transfer the total balance of your debt to a brand-new, no interest (for a limited time) credit card. Hence the name. These cards don't usually charge an annual fee. However, some may charge a one-time balance transfer fee (3–5% of the amount transferred).
By transferring your balance to a new, 0% interest card, you'll be able to make payments without getting hit with high interest rates (until the promotional deal expires).
Work with your creditors
This may sound ludicrous, but hear me out: You can negotiate with creditors. (I've done it!) Sometimes all it takes is reaching out to explain your unique financial situation to get what you need.
Not interested in chatting on the phone? Many creditors allow customers to change their due dates and apply for a new credit limit online (if your situation is just a matter of when you can make the payment).
Negotiate for a lower rate
Need a lower rate? Give your creditor a call and let them know what's going on. If you are a loyal customer (have been with the company for years) and have a good track record (e.g., making on-time monthly payments), you can usually haggle your way into a better deal.
Note: Negotiating your rate isn't synonymous with debt settlement. When you ask for a debt settlement, you agree to pay one lump-sum payment up-front — this could be 50% or more of your total balance.
Hardship program
If you face a financial hardship (e.g., loss of work due to COVID), your creditor may work with you to form a repayment plan. But, not all companies offer hardship programs, and they're rarely advertised. And, remember: You should only agree to terms you can afford.
Debt relief
If your total debt balance is astronomical, it may be time to call in the pros. Debt relief options (e.g., debt management plan or bankruptcy) could help you regain control of your finances.
Related: How to Pay Off $10,000 in Debt
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Debt management plan
A debt management plan is a unique repayment plan that's based on your budget and needs and is typically created with the help of a nonprofit credit counseling agency. Here's how it works: Instead of calling your creditors yourself, professional credit counselors go to bat to negotiate new terms that you can afford and help you consolidate your debt. Of course, this help isn't free — debt management companies charge their clients a fixed rate each month.
In addition to paying the debt relief company, you may also be asked to close your accounts and refrain from opening new credit accounts in the near future. Some charge hefty late fees, so be sure to do your research beforehand.
Bankruptcy
Bankruptcy should be your absolute last resort to paying off debt. Sure, filing for Chapter 7 bankruptcy takes care of all of your unsecured debt (e.g., credit cards, personal loans, etc.), but there are consequences. If you file for Chapter 7 bankruptcy, you could potentially lose any property you own and destroy your credit report (this info could last up to 10 years past the filing date!). If bankruptcy is the only way to go, consider filing for Chapter 13 bankruptcy, as it will allow you to keep your property and assets (depending on your specific situation).
Note: Bankruptcy cannot erase student loans, tax debt, child support, and/or alimony.
Costs involved in paying off debt
Unfortunately, there are costs involved in paying off debt. It seems unfair, but that's just the way life works — and it's how credit card companies make money.
Interest charges
Interest is skyrocketing across the U.S. According to CNET, credit card interest rates are estimated to rise between now and the end of the year. So, if you owe money, now is the time to pay it off.
Debt management fees
According to Forbes, working with a debt settlement or debt relief company could cost you 15–25% of the amount you've agreed to pay or of the total amount you owe. What's worse? If the company does manage to get you off with a lesser amount, the IRS may view it as taxable income.
Pros and cons of paying off credit card debt
Pros
- Improve your creditworthiness. Paying off unpaid debts could make you look more desirable to lenders in the future, which could improve your chances of getting a loan, buying a house, or a car.
- Stop collectors in their tracks. If you have debt collectors on your back, paying off your debt is one way to get them to leave you alone (e.g., the annoying phone calls, letters, emails, etc.).
- Improve your credit. Unpaid debt can put a damper on your credit score. In fact, your payment history makes up your credit score. Paying off your debt could give your score the boost it needs to help you secure a loan later down the road.
Cons
- Your debt could be "charged-off." If your debt is "charged-off," the creditor has decided your debt is a financial loss and prohibited further use of the account. This could cause your credit score to plummet and negatively affect your credit for years.
- You could end up paying for your mistakes twice. According to Equifax, late payments can stay on your credit report for seven years. This late payment mark will remain even after you pay the past-due balance.
- Closing an account could raise your debt-to-income ratio. Some debt consolidation programs require members to complete their accounts to participate in their service (example: National Foundation for Debt Management). When you do this, it could negatively impact your credit score.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
The bottom line
Getting out of debt can be a daunting task, but if you take the time to accurately assess the situation (e.g., find out what you can afford to pay off and how quickly), there are ways to dig yourself out before it becomes irreparable.
Before you decide on how to pay off your debt, write down what you owe on each account, the minimum payments, and their due dates, and go from there.
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Writer
Tabitha Britt is a New York-based freelance writer and editor whose work has appeared on INSIDER, the Huffington Post, and Taste of Home. When she's not glued to her computer screen, she can be found walking her beloved pooch, Biscuit.
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