Get out of debt with bad credit in 3 steps

About 61% of people with bad credit are likely to default on a credit account, according to FICO data. As a result, many lenders won’t approve you if you have bad credit, which can make it hard to get a loan or borrow the amount you need.

What is bad credit?

Bad credit generally refers to a FICO credit score of 579 or less. Your credit score is meant to represent your borrowing history. It’s affected by the frequency and timeliness of your payments, as well as how much you owe on your accounts, among other factors. 

If you’ve missed payments in the past or defaulted on one or more loans, your credit score likely took a hit for it. But fortunately, late payments, unpaid debts, and debts in collections come off your account after seven years. (One exception is Chapter 7 bankruptcy, which comes off your report in 10 years.) 

Getting out of debt with bad credit can be challenging, but implementing the following steps will help. 

1. Make a basic budget

Start by reviewing your finances from the past three months. Take note of your total income, then subtract your recurring expenses (including debt payments) to find your remaining income for each month. Then, find the averages.

For example:

From there, make two lists, one for your monthly recurring expenses, and one for your debts. When making the debt list, be sure to note the outstanding balance, monthly payment amount, and interest rate for each account.

For example:

Monthly recurring expenses

Minimum monthly payments

2. Optimize your cash flow

Now look for ways to cut your monthly expenses. Things like switching to a cheaper phone plan, canceling unwanted subscriptions, and planning cheaper meals could all save you money. Also consider increasing your income — negotiating a raise or starting a side hustle are two options. 

Review your debts to see if reorganizing them could save you money. For example, suppose you have the debts in the table above and qualify for a four-year, $4,000 debt consolidation loan with a 28.00% APR and $139 monthly payment. If you use the loan to pay off the three credit cards, you’d have about the same monthly payment but could pay the amount off entirely in four years.

3. Create a debt payoff plan

After optimizing your expenses and debts, recalculate the total amount of money you’ll have leftover each month. Then decide how much of that you want to put toward paying off your debts. 

For example, if you have $500 leftover each month, you may want to save $200 for incidental spending and put an extra $300 toward paying off credit card debt or high-interest loans. Once that debt is paid off, you could begin putting the extra $300 toward another debt.

Make a plan for how much you’ll pay toward each of your debts, how long it’ll take to pay them off, and in what order you’ll prioritize them (it’s often a good idea to pay off your balances with the highest interest rate first). 

Consolidate debt with bad credit

If you have bad credit and want to pay off multiple accounts, you may be looking into a loan for debt consolidation. These can allow you to borrow a lump sum and use it to pay off high-interest balances, potentially at a lower interest rate.

Along with reducing the number of payments you need to make each month, using an installment loan — like a personal or home equity loan — to consolidate debt can lower your rate and give you a fixed repayment schedule with a payoff date, something revolving accounts lack. Additionally, they can reduce your overall borrowing costs and build your credit if managed responsibly. You can use our loan calculator to estimate the amount you could save by paying off your debts with an installment loan.

Not all debt consolidation lenders will approve borrowers who have bad credit, but here are a few lenders known for having flexible eligibility requirements. 

Bad-credit debt consolidation lenders

4. Get help

If you’re unable to pay off debt on your own, that’s ok. Consider the following options to help get you back on your feet.

Credit counseling and debt management plans

If you’d like help making a debt payoff plan, consider a credit counseling organization that offers debt management plans. The credit counselor will contact your creditors on your behalf to work out payment schedules and may try to negotiate down your rates. Then, they put together a debt management plan based on the agreements. Once the plan is set, you’ll deposit money each month with the credit counseling organization, and they’ll use it to pay your creditors. The plan and payments will continue until the debts are paid off.

Debt settlement and negotiation with creditors

Debt settlement companies are organizations that work to reduce the amount debtors have to pay their creditors to settle debts. In many cases, they ask you to stop making payments on your credit accounts and start paying into an account with them. The goal is to accumulate a lump sum that can be used to negotiate a settlement with your creditors and save you money.

But going this route can be risky. When you stop making your credit payments, it will likely seriously damage your credit and can result in accumulated fees and penalties. It also can trigger aggressive collection attempts from your creditors and even lawsuits. While debt settlement companies may be able to settle your debts cheaper and faster than you otherwise could, there are no guarantees, and a great deal of damage can be done along the way.

Bankruptcy

Bankruptcy should be a last resort but the process can clear many types of debt. Under Chapter 7, your nonexempt assets are liquidated to repay your creditors, with the remaining eligible debt discharged. Under Chapter 13, you’re put on a three- to five-year payment plan, with the remaining eligible balances discharged once the plan is complete.

But either process can have a severe effect on your credit. Bankruptcy can drop your credit score by more than 100 points, it makes obtaining credit tough in the future, and stays on your report for seven to 10 years. 

How is my credit score calculated?

FICO scores are based on five main factors: payment history, amounts owed, length of credit history, credit mix, and new credit. Here’s how each factor is weighted and the behaviors that cause your credit score to drop in each category:

• Payment history (35%): Lenders want to know if you’ve paid your debts in the past. Making your payments consistently and on time builds your score, while missed payments, late payments, and defaults can all hurt it dramatically.
• Amounts owed (30%): This reflects your balances, as well as how much of your revolving credit you’re using. Red flags for lenders in this category include high credit utilization (such as maxed-out credit cards), as well as new term loans with large outstanding balances.
• Length of credit history (15%): If the average age of your accounts is low, lenders have less data on which to judge your ability to repay, making lending to you appear riskier.
• Credit mix (10%): Lenders want to see that you can handle multiple types of credit responsibly, and may be wary of borrowers with only one type of credit account, such as revolving or installment, on their reports.
• New credit (10%): Applying for or opening several new credit accounts in a short amount of time can raise alarm bells for lenders.

How to improve your credit score

Making a plan to pay off your debt is a good way to start improving your score, but there are other measures you should take.

• Make on-time payments: Payment history is the most important factor in your credit score, so make all of your payments on time.
• Minimize revolving balances: When you carry balances on revolving accounts, they increase your credit utilization ratio. For the best score and to minimize interest costs, pay off your credit card balances each month before the end of the billing cycle.
• Lower your debt-to-income ratio (DTI): Your DTI measures how much of your gross monthly income goes toward repaying your debt. Most lenders prefer a DTI below 36%.
• Keep accounts open: The longer your credit accounts are open, the better. If you no longer plan to use a card, put it somewhere safe, but leave the accounts open.
• Open more than one type of account: Having both revolving and installment credit accounts open — such as a credit card alongside a loan — can improve your credit mix.
• Don’t overdo new credit: Avoid opening multiple new credit accounts in a short time period to limit hard inquiries that ding your score. If you’re applying for a personal loan, look for lenders that offer prequalification to get a better idea of your approval chances before applying.
• Keep tabs on your credit reports: Check your credit reports periodically to ensure all of the information is accurate and up to date. Visit AnnualCreditReport.com for free copies of your reports, and dispute any errors you find to the appropriate credit bureau.

Along with the above steps, you may be able to quickly improve your score using Experian’s Boost program. To do so, create a free account with Experian, connect your bank account, and add bills like your rent, insurance, phone, and utilities. Experian will tell you right away if your FICO score can be boosted.

Methodology

We evaluated the best personal loan lenders for bad credit based on factors such as customer experience, minimum fixed rate, maximum loan amount, minimum credit score and income requirements, funding time, loan terms, fees, discounts, and whether cosigners are accepted. Our team of experts gathered information from each lender’s website, customer service department, directly from our partners, and via email support. Each data point was verified by a third party to make sure it was accurate and up to date. Read our full lender rating methodology for more information.

FAQ

Can I get a debt consolidation loan with bad credit?

It’s possible. Some lenders, like online lenders and credit unions, cater to borrowers with poor and fair credit scores, and have more lenient qualification requirements. If you’re hoping to consolidate with a personal loan, find out if you prequalify before applying for a personal loan.

Is it better to pay off debt or save?

Due to the costs, it typically makes sense to pay off high-interest debt like credit cards first. That said, if you don’t have any savings and run into an emergency, you may be forced to accumulate more high-interest debt. If you don’t have an emergency fund of at least three months' worth of expenses, you may want to establish that first. 

How to pay off debt in collections

If you have a debt in collections and want to pay it off, contact the debt collection agency. In many cases, you can make the payment online, over the phone, or by mailing a check. If you can’t pay the total amount or want to try and negotiate it down, give the company a call. They may be willing to settle for a lower lump-sum amount or set up a payment plan.