How to get out of debt with bad credit

Bad credit and debt often go hand-in-hand. That’s why there are many options for how to get out of debt with bad credit. We’ll explore the best ones.

Lindsay VanSomeren
March 20, 2024

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One of the best things you can do for your finances is to pay down debt, particularly high-interest debt such as large credit card balances. When you pay down debt, you save money in the long run, lower your monthly payments, and also help grow your credit score by lowering your debt-to-income ratio. That, in turn, opens doors to help you access better credit opportunities in the future. 

However, if you have bad credit, this can seem difficult, since you often need good credit to secure the best options for consolidating debt. Have no fear – while it can be challenging to get certain types of loans with bad credit, you still have plenty of other options. We’ll explore all of the different choices you have for how to get out of debt with bad credit.   

Financial habits to help you get out of debt

A good debt payoff blueprint consists of two parts: the underlying habits that help you stay financially healthy now and in the future, and the strategies you employ on a limited basis until you’ve paid off your debts. 

Focusing on your habits first can help you turbo-charge the strategies you’ll use to pay down your debt. These habits will also help you stay out of debt for good once you’ve paid it off.

Build and follow a budget

A good budget serves as a roadmap to your options and overall financial health. If you don’t already have one that you follow regularly, now’s a good time to make a budget. In particular, your budget will help you identify ways to save money, and how much you might be able to afford for extra debt payments each month. 

If you’ve tried budgeting in the past and it hasn’t worked, you’re in good company — and it doesn’t mean you’ve failed. It just means you haven’t yet found the right type of budget. Zero-based budgeting is great because it’s comprehensive, but that throws a lot of people off. If that’s happened to you, try another budgeting program, such as the cash envelope method. It may take several tries before you find the right budgeting method, but once you do, it’ll stick.  

Create an emergency fund

You can’t begin to pull your head above water until you have a lifejacket, and that’s what an emergency fund is. Many experts recommend that you save up a starter emergency fund of a few thousand dollars before diving wholeheartedly into your debt payoff journey.  That way, you don’t keep getting knocked back into debt every time something minor happens. 

Increase your income

One of the best things you can do to turbocharge your debt payoff journey is to boost your overall income. This will help you make quicker progress in paying back your credit card debt and saving up an emergency fund while smoothing out uneven income patterns

If you work for an employer, you can ask them for more hours (if you’re paid on an hourly basis) or for a raise, or consider another part-time job if you have the bandwidth. Otherwise, you can look for extra ways to earn income on your own, such as through a side hustle or selling things you no longer need. 

Lower your monthly expenses

A budget can help you identify ways to save money, but there are always ways to lower this amount further. Here are some ideas:

  • Use coupons and Groupons
  • Cut some of your subscription fees
  • Use your library card to rent movies and books
  • Lower (or raise) the thermostat in your home by a few degrees
  • Try doing no-spend challenges for a week or two (or a month) 
  • Make a habit of checking your budget before you go shopping
  • Experiment with new recipes to cook at home instead of eating out
  • Get a few rate quotes for insurance to see if there’s a cheaper option
  • Plan your meals each week around what’s on sale at the grocery store

Stop taking on new debt

Making a budget and saving an emergency fund can help you avoid taking on more debt. If you’re like many people, however, and find that you can’t avoid reaching for your credit card when it comes to a good sale, try these tips:

  • Switch to using cash for all your purchases. 
  • See if your credit card issuer allows you to set spending limits for yourself.
  • Put your credit card in a container of water and freeze it so you can’t easily access it.
  • Delete your credit card information from online profiles so you have to manually re-enter it each time you make a purchase.

How to get out of debt with bad credit

Once you’ve got a handle on the basic tenets of good money management, you’re ready to make quicker progress in paying down high credit card and loan amounts. Here are the top strategies to use that don’t necessarily require good credit:

Make sure your credit report is accurate

First, make sure your bad credit score isn’t a mistake or worse than it should be. According to an FTC study, 25% of people have errors on their credit reports, and occasionally, this results in triple-digit damage to their credit score. You can check your credit score for free with each of the three credit bureaus on

Give it a thorough combing-through, making sure all of the reported accounts are legitimate, the balances are accurate, and that you don’t have any inaccurately recorded late payments or other negative account notes. If you do, it’s a relatively easy process to file a dispute with each of the three credit bureaus online in order to get it fixed. 

Focus on one debt at a time

If you have multiple debts, it’s easy to get overwhelmed by how to pay them all off. In fact, it’s easy to choose: make the minimum payments on each, and choose one at a time to focus extra payments on. When you pay that debt off, roll that same minimum payment and extra monthly cash toward your next debt, which will allow you to make even faster progress with each debt you pay off.

You have two choices for how to prioritize your debts in this list: the debt snowball or the debt avalanche method. The debt avalanche method has you pay off your debts in order of highest to lowest interest rate, which helps you ax the most expensive debt first. The debt snowball method has you pay them off from the lowest to the highest balance, which offers immediate debt-payoff wins to help motivate you for the long journey ahead. 

Neither method is right or wrong, it just depends on your debts and your preferences. A good free resource that can help you run the numbers and see the power of both methods is

Negotiate with lenders

Although it can be scary, oftentimes, your current lenders can be your biggest help in making your debts affordable for your budget. Depending on your lender, you may be able to contact them and negotiate different types of debt assistance:

  • A lower interest rate
  • Temporary forbearance or deferment
  • An extended loan term to help shrink monthly payments
  • A lump-sum settlement in exchange for forgiving the remainder of the balance

Check for grants, payment plans, and other aid

There may be special programs available to assist you, depending on the type of debt you have and your other circumstances. If you have medical debt, for example, you may be able to take advantage of special personal loans or grants for certain conditions. 

Many affordable payment plans and loan forgiveness options are also available for federal student loan debt, as well. If you’re on a limited income, you may also be able to take advantage of special grants and affordable loan options to repair or update your home to your current needs. Check if you need help finding available resources in your area. 

Consult a credit counselor

An extremely helpful resource for many people is a nonprofit credit counseling agency, which can serve as a jumping-off point for many different forms of debt assistance. Typically, you’ll work one-on-one with a credit counselor during an intake session to help you create a budget and sort through your options for how to get out of debt, even with bad credit. They may help coach you in how to work with your lenders to negotiate your debt, and — in many cases — help you set up a debt management plan. 

When you sign up for a debt management plan, a credit counselor will reach out to your lenders for you to negotiate an interest rate reduction, fee waivers, and other ways to help lower your monthly payments to fit within your budget. You’ll then make one monthly payment to the credit counseling agency to distribute to your lenders. Typically, you’ll pay off your debt in three to five years and may even increase your credit score. 

Debt management plans typically require a one-time startup fee of up to $75, followed by a monthly fee of up to $50. Agencies work on a sliding scale, however, and often waive fees for people on a limited income. Other support provided by nonprofit credit counseling agencies is usually free or offered at a low cost. You can find a reputable agency through the National Foundation for Credit Counseling

Revisit your 401(k), 403(b), or 457(b)

If you have money saved for retirement, you may be able to borrow some of those funds. A 401(k) loan has a couple of distinct advantages. There’s no credit check required since you’re borrowing your own money, and you’ll pay interest to yourself — not a lender.  

This is risky, however, since if you lose your job or quit, you’ll likely need to repay the entire balance in full — something most people aren’t able to do. In addition, while paid to yourself, the interest rate offered is typically less than what you would earn if you had kept your money invested, meaning that you may lose out on investment gains. 

Some employers allow you to withdraw money from your retirement account outright using a hardship withdrawal, but this is something to consider especially carefully. You won’t be able to put that money back in, meaning you’ll permanently have less saved for retirement. The definition of what qualifies as a “hardship” excludes consumer purchases like TVs and watercraft, although things such as medical debt do count. It’s also an expensive way to borrow: you'll likely owe income taxes on the amount you withdraw, plus an additional 10% tax unless you qualify for a special exception. 

Leverage home equity

If you have sufficient equity in your home, another option is to borrow against it. Typically, you’ll need at least 20% equity to qualify. Equity is defined as the value of your home that you “own” relative to any other debts tied to it, such as a mortgage. You’ll still need to pass a credit check in order to borrow against your home equity, although the requirements are typically less strict than for unsecured debt such as a consolidation loan with bad credit.

There are many ways to borrow against your home equity:

  • Home equity loan: A lump-sum loan featuring a fixed interest rate and stable monthly payments.
  • Home equity investment (HEI): HEIs offer a lump sum of money in exchange for a portion of your home’s value in 10 to 30 years, repaid as one large balloon payment rather than monthly. 
  • Home equity line of credit (HELOC): A line of credit that you can borrow against as you need during a draw phase, featuring a variable interest and a final repayment phase. 
  • Cash-out refinance mortgage: A mortgage refinance loan made for a larger amount than you owe, extending your repayment period and offering the remaining funds as a lump sum. 

It’s important to consider these options carefully as well. Borrowing against your home will result in a lien being placed on it, and if you default on that debt, the lender can foreclose on your home. It also means you’ll have to wait longer before you own your home, free and clear of any debts. Certain types of home equity products, such as a home equity investment, may have less stringent credit requirements than others. 

Explore debt settlement

Debt settlement companies promote flashy and alluring advertisements about slashing your debt costs in half, if not more. Most experts caution against these companies because they require you to intentionally default on your debt, which results in even more debt via fees, interest, and possibly even legal action and wage garnishment. It also causes significant and long-lasting damage to your credit score. 

Debt settlement companies can often settle your debt for 50% less. However, most companies typically charge 25% of your initial debt, cutting your “savings” in half from what it first appears. When you consider extra hidden fees for required accounts and legal charges — and the fact that forgiven debts are considered taxable income by the IRS — you generally don’t save much, if at all. For most people, the stakes are generally too high for a risky gamble like this. 

Consider bankruptcy

A final option for many people is declaring bankruptcy, which can provide real help under the right conditions. However, it also comes with significant drawbacks. There are two types of bankruptcy. 

Chapter 7 bankruptcy is the traditional type most people think of, where most of your property is sold (depending on your state) and used to repay as much of your debt as possible, with the remainder being forgiven. Chapter 13 bankruptcy is more similar to a debt management plan, allowing you to make steady debt payments for three or five years, after which time the remainder is forgiven. 

Not all debts are eligible for bankruptcy, and some debts — such as student loans — have special rules that can make it nearly impossible for most people to include them in a bankruptcy filing. Bankruptcy is a legal proceeding and must go through the courts, which involves a lot of fees. You can represent yourself, but due to the complexities involved, it’s recommended that most people hire a bankruptcy attorney. 

All together, filing for bankruptcy can cost from $400 to $3,000 out of pocket. You’ll also have long-lasting damage to your credit since bankruptcies stay on your credit record for nearly 50% longer than any other negative mark, affecting your ability to secure other credit for the next 10 years. 

Final thoughts

You don’t have to stay in debt forever, even if you don’t have the best credit. We’ve presented a range of options and ideas here for how to get out of debt with bad credit, no matter what type of situation you find yourself in. If you’re not sure how to proceed, a good first step is consulting a nonprofit credit counselor who can help you sort through your options and develop a plan to take the first steps toward a debt-free life. 

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