One of the most difficult things is getting out of debt, especially when you’re on a lower income, just graduated college, and aren’t making your “full” potential yet. But it’s ironic how easy it is to accumulate debt over time. And, it can have a rippling effect, so you want to do everything you can to get rid of it. Here’s what you need to know about becoming debt free on a low income.
How can I be debt-free on a low income?
I know, I know, it can seem impossible to pay off debt, especially if you’re low income and have higher amounts. But, just as a quick note, I paid off over $25k in debt in 3 years in a higher cost of living city, and during that time my (now) husband and I didn’t make more than $40k COMBINED. So it’s possible!
We’re going to share actual tips on becoming debt free on a low income, but the key is to be consistent. Sending anything towards debt is better than sending nothing at all.
Staying focused and working at it little by little is better than letting it grow into exorbitant amounts because it seems overwhelming.
It’s not impossible, it’s just going to take more time and a little more creativity. But that doesn’t mean it can’t be done. So don’t compare your journey to others, and be realistic about what it will take (and how long it will take) to become debt free.
Becoming debt free on a low income isn’t easy, but it’s worth it!
Is it really worth it to become debt free? Is it worth the struggle?
As someone who is now debt free, I’d say YES!
It’s nice knowing that all of my money is mine and mine alone. I don’t have to pay anyone interest to live life on my terms.
But, some people get into debt to better their lives, like attending college or even taking out business loans. And sometimes, we need to do those things just to survive. So I get it. Your debt doesn’t make you a bad person. And it’s okay if it’s not your biggest priority (especially if you’re trying to keep your 4 walls up!).
But I can say with full confidence that if you can be debt free, you should certainly work towards it.
At what age should you be debt free?
This will depend on you, and no answer is right or wrong. But I would say the sooner, the better. The less you have to worry about as you age and work towards retirement, the easier it will be to build a nest egg.
Will being debt free hurt my credit score?
Yes and no.
I know, it sucks right?
So, it will lower your credit score. This is because your credit score focuses on your borrowing power. So if you aren’t borrowing anything, it can lower your score for the first few months. But usually, it rebounds, or at the very least gets back to the score you had before.
However, a clear credit report looks better than bad credit. And there are other ways to get loans or credit if you do need to boost your score fast.
If you know you’ll need to get credit soon (through a mortgage, personal loan, etc), plan ahead. Pay off the debt, wait a few months, and your credit score should be fine!
Can you pay to reset your credit score?
No. Your credit score starts the moment you borrow money. But, if you have money in collections, you can do a “pay for delete“. In other words, once you pay off the debt, they’ll delete it from your credit report.
Not all creditors do this, but many will so they can get you to pay what you owe. This can boost your score because it will no longer show that you have debts in collections.
How many Americans are debt free?
Only 23% of Americans have reported being debt free. So you aren’t alone in your debt payoff journey. In fact, 53% of Americans have plans to pay down — or pay off — their debt.
Some financial gurus will say that you should never be in debt and anything over $0 is bad. But, that’s not always true, and not everyone has rich parents, working spouses, or generational wealth that they can rely on. Sometimes, you have to get into debt to better your life — and that’s okay.
However, the debt you have, and if it’s manageable or not, really depends on you and your finances.
If you’re only making $30,000 a year, being in 6-figure debt can be suffocating and harder to get out of. But if you make $50,000 a year, and only have $5,000 on a car loan, that’s easier to deal with.
Overall, The Consumer Financial Protection Bureau recommends that you keep your debt-to-income ratio below 43%. If you can swing it, try to keep it even less than that (think 30%-35% max). That way, you can meet your other financial obligations, and still focus on paying down debt.
What happens if I can’t pay my debt?
What happens if you can’t pay your debt?
Put simply, it will go to a collection agency.
From there, your credit history and score will be affected too — most likely going down by quite a few points.
But all hope is not lost. It is possible to pay off debt, even if it’s gone to collections.
Again, your debt doesn’t make you a bad person. But it is important to learn what you need to do and try to get it paid, especially if you’re trying to keep a good credit score.
Is it true that after 7 years your credit is clear?
Yes and no.
Most negative information or collections will disappear after 7 years from your credit report. But bankruptcy stays on your credit report for 7 to 10 years, depending on how you filed. And, closed accounts stay on your credit report for up to 10 years.
Keep in mind that the creditor you work with can “sell” your debt to another, and if they contact you, and you admit that it is what you owe, or if you work out payments with them, the time updates. So the 7 years will start all over again.
Is debt written off after 7 years?
Technically, yes. It will fall off your report within 7-10 years. However, this doesn’t always mean that you’re in the clear.
For example, if you get a car loan and don’t pay, and your car is repossessed, the company you worked with may not want to loan you money again because they’ll still see that you never paid off your loan. So while it won’t always affect your credit, it will affect your business and credit relationships.
Usually, the statute of limitations for debt is 10 years. So anything after that can’t be legally pursued (but again, this depends on the debt). However, a debt collector can still pursue it, and you are still technically liable to pay it, even if they can’t take legal action against you.
Do unpaid debts ever disappear?
No. They will drop off your credit report after a certain time period, but your debt will always be your debt. It goes back to building and breaking those business and finance relationships.
For example, you can’t close a bank account that you owe money on and then expect to get a new bank account 10 years later. Most likely, the bank will tell you that you owe them money and that they won’t work with you. So even though you may not see that debt on your credit report, the bank will know.
Ways To Pay Off Debt With A Low Income
Okay, let’s talk about some ways to pay off debt with a low income. There are many different tips and tricks that you can try, but the following are the most important tools that you should focus on.
Prioritize Your Student Loans
So you’ve graduated college and gotten a job (even if it’s not a good one or doesn’t pay well). Now is the time to focus on and prioritize your student loans.
Student loan debt is one of the highest amounts of debt you can have. While how much you spend on college depends on your degree, you’ll still have to pay it back.
However, there are ways around this.
First, you can shop around for lenders that offer the most favorable interest rates so you can maximize your cash flow when you begin to repay after graduation. To get an idea of what you will be paying, you can use a student loan calculator too.
After the repayment period begins, you can look at refinancing it. This is especially important if you’re looking to go back to college for another degree. Student loan refinancing gives you a new loan to work with while also lowering how much you have to pay each month.
Budgets are incredibly important for becoming debt free on a low income.
Budgets are a simple concept, but they’re also one of the most important things you can have. They’re what allow you to get a grasp on your finances and help you save money each month.
When it comes to getting rid of debt, you’re going to need all the funds you can get. If you’ve recently taken out a loan or refinanced one, your old budget might not cut it anymore. Since you’re making a new budget from scratch, you should try to cut costs as much as possible.
You can center your budget around the 50/30/20 method. This is a commonly used budget method people use to ensure everything is paid off on time while having savings each month. You put 50% towards the necessities, take 30% for yourself, and then save the remaining 20%.
If you need a more detailed budget, try an all-cash budget or a zero-based budget, so you know where every penny is going.
Pay Extra If You’re Able
One of the reasons paying off debt can be so slow is because we try to pay as little as possible to avoid having less money in our accounts. While that’s not a bad way to manage your payments, it’s best if you put as much as you can toward your payments.
Fortunately, you’re only limited to paying a minimum each month. So if you have some additional money, you’ll be better off putting it towards your debt. The more you pay, the quicker your debt can disappear.
Try Not to Overspend
Being short on cash with a debt payment coming out is something you need to avoid. Not only is it stressful, but it can put you behind.
Try to avoid overspending money and stick to your budget. After all, the primary goal is to save money and eliminate debt as quickly as you can, even on a low income.
If you miss a deadline, it can lead to a lot of serious issues down the road.
For one, it goes on your credit report. And if it does somehow manage to get through to collections, it can lower your score.
Your credit score is what ultimately dictates your eligibility for taking out new loans, getting a limit increase on your credit cards, and even being approved for housing. So be sure to take your payment dates seriously.
Becoming Debt Free On A Low Income: It is Possible!!
As you can see, becoming debt free on a low income doesn’t have to be hard or daunting. It’s possible to do it and still enjoy life. But, it’s important to stay consistent and keep your eyes on the prize — whatever that may be for you!
AUTHOR Kimberly Studdard
Kim Studdard is a project manager for online entrepreneurs and small businesses. When she isn't spending time with her daughter and husband, or reading her growing pile of horror books, you'll find her working on her HR degree and working towards FIRE.