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Six Tips for Paying off Debt with a Low Income

During the pandemic, countless consumers saw their hours curtailed or their jobs eliminated, sometimes leading to a drastic reduction in income. While many have people have been able to fill some of the gaps with increased unemployment checks or funds earned from a side gig, trying to cover bills can be daunting when facing a shortfall, especially if you are also trying to pay off debt fast with a lower income.

Making a dent in your debt can not only be empowering; it can also help you reach your financial goals, even if you are underemployed. Here are six strategies that can help you pay off debt faster with a low income.

1. Tighten your budget

Sometimes it takes drastic reductions to make a significant difference, and that’s where a belt-tightening budget comes in. The goal of this type of budget is to cut back to only necessities, which means you’re going to remove the majority of frill; think dining out, streaming subscriptions, impulse buys and essentially anything that’s optional.

When considering how to tighten your budget, you also might consider reducing a major expense, such as selling an extra car if your family can get by with just one. Even if you didn’t have a car payment, that extra vehicle likely costs you you each month due to insurance, fuel and other fees.

Cutting costs can be hard on everyone so remind yourself and your loved ones that this austere spending plan is meant to be temporary. You can even challenge them to get involved by turning it into a game. Brainstorm ways to save, like replacing your weekly Friday night pizza delivery with homemade pies; give everyone a role, such as the “energy monitor” who turns off lights and lowers the thermostat to save on utilities; or encourage them to see how far they can reduce the grocery bill with savings apps and private label products.

The more you cut now, the quicker you can get back on your feet. Try to set a timeline for how long you need to maintain the minimalism, and then gradually add one or two treats back in when you feel a little more secure. Just be careful not to return to your full spending ways until you are confident that a new job will cover all the bills and then some as you get your finances back in order.

2. Negotiate with creditors

Many service providers understand that people are going through rough times given the financial climate and are willing to work with you. But, you do have to ask. Don’t rule out negotiating with creditors to reduce debt. They may be able to offer accommodations such as lowering your payments, dropping down a tier on your cell phone plan and other necessary services or extending your payment terms. The goal is to avoid missing payments and the possible adverse effect to your credit score.

If you are able to work out an alternative plan, ask to receive all the details in writing to ensure you didn’t misunderstand something on the phone. You don’t want to inadvertently ding your credit if you miss a payment because you thought the lapse had been approved.

3. Maintain your debt payments

Any funds you were able to squeeze from your budget or help from your creditors in the first two suggestions should be applied to your debt to help maintain your financial wellness. If you have revolving credit, like credit cards, you want to be sure you are paying at least the minimum payment on all your balances, but try to pay more if you are able to help keep interest in check.

If you haven’t already, look into automating your bills so you don’t miss a payment that could further harm your credit. It’s important to adequately cover your current debts and keep from amassing more, even with a lower income.

4. Consider debt consolidation options

If you have multiple high-interest credit cards or other bills you are struggling to pay, one option may be to consolidate that debt to a single loan with a potentially lower interest rate. This can boost your financial health over the long term, and having just one bill to manage can streamline your financial life now.

It’s important to note that getting a debt consolidation loan can be harder if you are unemployed. It is still worth looking into whether you qualify for a personal loan. If you have a strong credit history and income from another source, you may still be eligible.

5. Talk to a credit counselor 

A nonprofit credit counselor can help assess your financial situation for free or a nominal fee. They’ll delve into your bills and financial habits to help you explore debt consolidation while unemployed and suggest ways to pay off debt fast with a low income. And they can give you the financial confidence you need to get out of debt.

Wondering if a credit counselor is right for your situation? The National Foundation for Credit Counseling (NFCC) can help connect you with a financial advocate who can tell you more about their services and how you can work together. The first discussion should be free, so you should have nothing to lose from an initial meeting.

6. Celebrate your achievements as a way to keep going

There’s no doubt that debt consolidation while unemployed is challenging, and may even feel impossible. But remember every step counts in getting you closer to the target.

It can be hard to stay the course, so make sure to reward yourself when you hit a milestone; consider a nonmonetary reward so you don’t backslide, like some at-home pampering or a streaming movie binge. Or, if you have a bit to spare, even a very small splurge, like a latte at the corner café, will feel huge after the sacrifices you’ve made.

Instead of focusing on what you’re giving up today, concentrate on the upcoming relief and accomplishment you will feel as you eventually achieve a brighter financial future.

If you have a high-interest loan, you may want to find out more about debt consolidation. The Discover debt consolidation calculator can help you assess your options.