Overcoming Debt with a Low Credit Score

If you're struggling with debt and have a lower credit score, it can feel like an endless cycle - high interest rates, declined loan applications, and monthly payments that barely make a dent. But here’s the good news: you are not stuck. No matter what your credit score, there are real, actionable steps to take control of your finances, break free from debt, and rebuild your credit over time.

Whether you need quick fixes to free up cash or long-term strategies to turn things around, there are solutions available. In this blog, we’ll loosen the reins debt has on your monthly budget and help put you back in control of your finances.  

Short-Term Solutions: Quick Wins to Free Up Cash

Debt can weigh you down. Often, what you really need to get back on track is a little breathing room. Luckily, there are a variety of steps you can implement to do just that, giving you quick wins to free up cash when you need it most.

Research Your Due Dates

Between bills, loan payments, and other financial obligations, it can feel like you’re juggling a world of non-stop due dates. It can be very challenging if these dates don’t align with your pay schedule. However, did you know that many organizations and lenders will allow you to change the date your payment is due?

Contact your lenders and ask if you can switch your due date to match your pay schedule. This simple solution can help ensure you have funds available when payments are due, hopefully reducing the risk of late fees and improving your credit score.

Ask for a Lower Interest Rate

You don’t have to accept high interest rates forever! If your credit score has improved even slightly or your financial situation has stabilized, you may qualify for lower rates (and lower payments). 

Reach out to your creditors and ask for a loan rate reduction. Many institutions will agree if you’ve been making payments on time and your credit score is trending upward. Even a slight reduction in your loan rate can save you hundreds or thousands in interest over the life of your loan.

Talk to Your Lenders Before You Miss a Payment

If you’re struggling to make an upcoming loan or credit card payment, do not ignore and miss it! Doing so will damage your credit score further, undoing any positive progress you’ve made. Instead, contact your financial institution before your due date and explain your situation. 

Most lenders have options available, such as skipping one payment, that will not lower your credit score. For example, if you skip your $400 car payment for a month, you can use those funds to pay off high-interest credit card debt - providing a little wiggle room in your budget.

Long-Term Strategies: Breaking the Debt Cycle for Good

While short-term fixes help, lifting yourself out of debt for good and rebuilding your credit score requires a solid debt repayment plan. Several tactics can simplify the process and let you see the light at the end of the tunnel.

The Snowball Method (For Motivation)

• Begin by paying extra toward the smallest debt first, while making minimum payments on everything else.

• Once that debt is gone, roll that payment into the next smallest debt, like a snowball getting bigger. 

• Watching your overall balance decrease helps you stay motivated and committed to paying off the rest of your debt. 

The Avalanche Method (For Maximum Savings)

• Focus on the highest-interest debt first, while making minimum payments on everything else. 

• Once you pay off the most expensive debt, move to the next highest-rate balance.

• This strategy saves you the most money on interest in the long run. 

Work with a Financial Advisor (One-on-One Assistance)

While withdrawing funds from tax-advantaged retirement accounts is a last resort, you might have other investments worth exploring. If you’re paying 20% or more in loan or credit card interest but only earning 5% or less on investments, it might be wiser to use your savings to eliminate costly debt. Your financial advisor can dissect your debt and suggest courses of action that won’t jeopardize your retirement savings.

Debt Consolidation (For Simplicity & Lower Rates)

Debt consolidation combines multiple high-interest debts into a new, lower-rate loan. The best part? The savings are immediate! Through debt consolidation, you can:

• Reduce your monthly payment.

• Eliminate debt faster and more efficiently. 

• Significantly reduce your interest costs.

Move high-interest credit card balances and short-term loans to a lower-rate loan with the credit union. Debt consolidation loans help you pay off debt faster, significantly reduce how much you pay in interest, and provide an exact date when you’ll become debt-free.

Helping You Take Control of Debt

Consolidating debt is one of the easiest and quickest ways to reclaim control over your finances. Three common solutions can dramatically change your financial situation overnight.

Credit Card Balance Transfer

Transfer high-interest credit card balances to a lower-rate credit card with the credit union. You’ll immediately reduce the amount of interest paid monthly – freeing up money to pay down additional debt or boost your monthly budget. This option allows you to pay off debt at your own pace.

Home Equity Line of Credit (HELOC)

If you’re a homeowner, you can use the equity in your home to qualify for some of the lowest interest rates around. Plus, HELOCs have terms of up to 10 or more years, providing affordable payments for any budget. This option is ideal if you have significant credit card debt.

Our Get Out of Debt Coach can help you make a customized plan to pay off your debt and learn more about what some of these strategies could look like for you.

Debt and a lower credit score don’t define you, they’re just challenges you can overcome with the right help and plan. By making small changes today and following a long-term strategy, you can reduce your debt, improve your credit, and take control of your financial future.

If you want to learn more about how debt consolidation works or how much you can save, we’re ready to help. Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to speak with a representative today. 

 

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