top of page

How Can Someone with Bad Credit Get Out of Debt?

  • Writer: Jennifer Wills
    Jennifer Wills
  • Jun 27
  • 4 min read

Updated: Jul 20




ree

When I was married, we had mortgages on three condominiums, two car payments, and substantial credit card debt. Needless to say, a lack of planning had us extremely stressed about our financial situation.

 

When we finally decided to sit down and create a plan to pay off our debt, we relieved the financial pressure we were under. Making small changes and seeing progress encouraged us to continue.

 

Paying off our credit cards took a metaphorical weight off our shoulders. We had additional money in our budget to put toward our car payments and mortgages, which helped us sleep better at night.

 

What a Bad Credit Score Is 

A credit score is a numerical representation of an individual's creditworthiness. Lenders use this number to evaluate the risk of lending money. An individual’s credit score impacts the odds of approval for loans, credit cards, and other forms of credit, as well as the interest rates offered. 

 

Experian, a top credit reporting agency, rates credit scores in the following ranges:

 

Fair Issac Corporation (FICO) score:

  • Very poor: 300 to 579

  • Fair: 580 to 669

  • Good: 670 to 739

  • Very good: 740 to 799

  • Excellent: 800 to 850

 

VantageScore

  • Very poor: 300 to 499

  • Poor: 500 to 600

  • Fair: 601 to 660

  • Good: 661 to 780

  • Excellent: 781 to 850

 

Factors Influencing Credit Scores

The credit scoring model impacts how credit scores are calculated. The main factors include:

 

FICO score

1.  Payment history (35%): Whether the accounts are paid on time

2.  Amounts owed (30%): The amount of credit and loans compared to the total credit limit

3.  Length of credit history (15%): How long the credit history has been established

4.  New credit (10%): How often new credit is applied for, and accounts are opened

5.  Credit mix (10%): The variety of credit products, such as mortgages, installment loans, and credit cards

 

VantageScore

  1. Extremely influential: Payment history

  2. Highly influential: Type and duration of credit and percent of credit limit used

  3. Moderately influential: Total debt load

4.    Less influential: Available credit, recent credit behavior, and inquiries

 

The following strategies can help someone with bad credit get out of debt.

 

Debt Snowball Method

The debt snowball method is a strategy for paying off debts from the smallest balance to the largest. When one debt is paid off, the payment that was being made is rolled into the next-smallest balance. Eliminating each debt creates momentum to continue making progress.

 

These steps help individuals use the snowball method to pay off debt:

1.  List the debts from smallest to largest.

2.  Make minimum payments on all debts except the smallest.

3.  Put as much additional money as possible toward the smallest debt until it is paid off.

4.  Take the amount previously paid on the smallest debt and add it to the payment on the next smallest debt until the debt is gone.

5.  Repeat the process until each debt is eliminated.

 

Debt Avalanche Method

The debt avalanche method is a strategy for paying off debts from the highest interest rate to the lowest. When one debt is paid off, the payment that was being made is rolled into the debt with the next-highest interest rate. Eliminating each debt creates momentum to continue making progress.

 

These steps help individuals use the avalanche method to pay off debt:

1.  Order the debts from highest to lowest interest rate.

2.  Make minimum payments on all debts except the one with the highest interest rate.

3.  Put as much additional money as possible toward the debt with the highest interest rate until it is paid off.

4.  Take the amount previously paid on the debt with the highest interest rate and add it to the payment on the debt with the second-highest interest rate until the debt is gone.

5.  Repeat the process until each debt is eliminated.

 

Credit Counseling

Credit counseling guides an individual on credit, money management, debt management, and budgeting. Most agencies are nonprofit organizations that negotiate with creditors on behalf of a borrower to reduce credit card and loan interest rates and waive late fees:

  • The credit counselor works with the individual to develop a manageable financial plan and pay off their financial obligations.

  • The individual develops budgeting and debt management skills.

  • Understanding the fees involved helps determine whether to pursue credit counseling.

 

Debt Management Program

A debt management program is a repayment plan set up and managed by a credit counseling agency. The nonprofit organization offers education and assistance to help individuals better manage their finances:

  • A credit counselor negotiates with creditors to create new payment plans on unsecured accounts, such as credit cards.

  • Creditors might waive fees and lower the interest rate on the accounts.

  • The individual makes a monthly payment, plus a small fee, to the credit counseling agency.

  • The agency pays the creditors on the individual’s behalf.

  • The goal is to repay the debts within 3-5 years.

 

*This information is for educational purposes only.

Comments


bottom of page