How to Get Out of Debt With Bad Credit

Bad credit can be limiting in many ways. Unfortunately, it is typically the consumers with the most need for credit that don’t qualify for it. Due to this, it can sometimes be more difficult to get out of credit card debt if you have bad credit.

Bad Credit Means High Interest Rates

The main reason it can be harder for people with bad credit to get out of debt is because bad credit equates to high interest rates. Due to this, anyone carrying debt with bad credit is going to be paying more to service their debt than a consumer that has good credit. This is sort of a double whammy. When you have higher interest rates, more of your payments are going towards interest (as opposed to principal), this will put you at a disadvantage to any peers carrying debt with good credit. This is unfortunate because this means that individuals with bad credit are ultimately paying more in finance charges and more for extensions of credit than those with good credit. In a way this perpetuates their debt load and means that they have to use more of their dollars to knock down the principal on any balances or debts owed.

Secured Credit Card and Credit Builder Loans

This is the most overlooked tactic to help build credit in the long term. Credit diversity is a very important part of FICO’s algorithm. If you don’t have any secured debts this is an “easy win” to improve your credit score in the intermediate term. Although, you will have to put up cash reserves to secure the credit card, it is well worth it, if your credit is close to nonexistent. Opening up a secured credit card or a credit builder loan.

Payoff Any Unpaid Balances

If you have unpaid debts whether they are small utility bills, credit card accounts in collections, etc., you should really consider trying to pay off these accounts or settling them for less. This could lead to an easy credit score win and your score should see an improvement once the accounts are reported as paid to the bureaus within a couple months. Paying off debts will typically lead to a favorable outcome in regards to improving your credit worthiness.

Limited Options

When you have bad credit, you are much more limited in your options to consolidate debt or transfer your debts to lower APR accounts. Options like a debt consolidation loan will likely not be available to you, so you cannot consolidate with a lower APR loan. Options like balance transfers also become non-existent, so you are unable to take advantage of promotional 0% balance transfer offers (an option highly utilized by people with good credit).

In Short, when you have bad credit you end up paying more for debt via higher interest charges. Whether it is new debt or old debt, credit card APRs (especially) come with a highly variable rate, so regardless of market fluctuations in interest rates, having bad credit will mean you end up paying more for borrowing money than those with good credit.

Often times, its the debt that is the problem. If you pay off your debt or clear up your old uncollected debt accounts, it could end up being highly beneficial to your credit worthiness in the long term.