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How to Pay Off Your Debt Quickly With Low Income

Don't let limited income stand in the way of being debt-free with these debt-payoff tips.

Justin Cupler

Contributing Writer at Tally

July 27, 2021

A low income mixed with growing debt may make you feel overwhelmed. Fortunately, there are tools to pay off debt quickly, despite a low income. Whether it's consolidating your debt or finding creative ways to increase your income, all it takes is planning and a little ingenuity. 

Below, you'll learn how to pay off debt fast with low income using various methods. One option may fit your financial situation perfectly, but you can also mix and match multiple methods to further accelerate your debt payoff. 

Debt-to-income ratio and why it matters

When it comes to healthy personal finances, your debt-to-income (DTI) ratio plays a significant role. Not only does it show how much of your income goes to making monthly minimum debt payments, but lenders also require a certain DTI ratio, which is expressed as a percentage, to approve new loans. 

To calculate your DTI ratio, add up all your monthly debt obligations, including car payments, credit card payments, mortgage or rent payments, personal loan payments, line of credit payments, alimony, child support and others. Then, divide your total monthly debt payments by your gross monthly income, which is your pretax income, and multiply that number by 100 to get the DTI percentage. 

For example, if you have $750 in debt payments and a gross monthly income of $2,500, you have a 30% DTI ($750 / $2,500 = 0.30 and 0.30 X 100 = 30%).

With a low income, DTI may seem difficult to manage, but it's far from impossible. 

How to pay off debt fast with low income

Paying off debt and lowering your DTI is possible with careful money management, and the first step is to create a manageable monthly budget you can stick with. While making this budget, determine which monthly expenses you can eliminate and adjust your spending habits to help expedite the debt-repayment process.

For example, in most cases you can't eliminate your utility bills. Still, you can cancel that old streaming subscription you never use or cut back on food expenses by packing a lunch instead of buying takeout. 

When budgeting and trimming expenses, your goal is to create an income surplus that'll allow you to direct more funds toward paying off debt. 

Here are a few ways to make the most of these extra available funds and pay off your debt.

Debt avalanche

The debt avalanche method is a wise way to manage debt repayment, as it focuses the extra money in your budget on paying down your highest-interest-rate debt first while making the minimum monthly payments on the other debts. 

Focusing on your high-interest-rate debts first can help reduce the amount of total interest you pay, saving you money over time. However, it can take some time to pay off your first debt, depending on your balances, so you'll need to be self-motivated to stay on the path toward becoming debt-free. 

Debt snowball

The debt snowball method is similar to the debt avalanche, but you apply all the extra cash in your budget toward your debt with the lowest balance while making the minimum payments on the rest. 

By focusing your extra money on the smallest debt, you may enjoy quick wins earlier. This can help keep you motivated, and you can ride that wave through the rest of the process of becoming debt-free and reaching your financial goals.  

Debt consolidation

Debt consolidation is another option to help you pay off debt faster. With debt consolidation, you take out a lump-sum personal loan to pay off multiple high-interest debts and make just a single payment on the loan. 

A debt consolidation loan usually has a lower interest rate than credit cards, so you save money throughout the loan. It also lowers your number of monthly payments, making it easier to manage your payments and avoid late fees. 

Another positive to a debt consolidation loan is paying off your revolving credit card debt with an installment loan. This will drop your credit utilization ratio — the balances of your revolving debts relative to your credit limits — which can result in quick and noticeable FICO credit score increases. 

Balance transfer

A balance transfer credit card is another way to pay off debt with a low income. If you qualify for a credit card with a relatively high credit limit and a 0% balance transfer promotion, you can lower your monthly payments, pay off your debt quickly and avoid interest charges. 

These 0% APR promotions typically last six to 18 months, depending on the credit card issuer. The credit card company won't charge you interest during this time, so 100% of your monthly payments go toward paying the balance. 

You can quickly determine how much you should pay each month to be debt-free before the interest charges start. Simply divide the total balance by the number of months in the 0% APR promotion. For example, if you have a $2,000 balance on an 18-month promotion, you'd want to pay $111.11 monthly ($2,000 / 18 = $111.11) to repay the debt within the promotion. 

You can also consolidate multiple lower credit card balances onto one balance transfer credit card if needed. 

Watch out for the balance transfer fee, though. Most credit cards charge a 3% to 5% balance transfer fee. So, if you transfer $2,000, you could incur a one-time $60 to $100 fee, which the credit card issuer adds to your balance. However, paying this fee is generally cheaper than interest payments. 

Credit counseling

With low income and high amounts of debt, you may be a prime candidate for credit counseling. Contact a credit counseling agency and speak with a representative about your debts, income, budget and financial goals. 

The credit counselor will review your file and determine if the agency can help. A credit counseling agency can speak with your creditors about lowering interest rates, waiving past late fees, eliminating other recurring fees and more. Once the counselor completes the negotiation process, they will create a debt management plan (DMP) where you make one monthly payment to the counseling agency, and it will disburse the payments to your debts.  

You can find an accredited credit counseling agency via the National Foundation for Credit Counseling (NFCC), most of which work as nonprofits. Though they're nonprofits, many credit counseling agencies will charge a fee for their DMP services, which are capped at $79 per month

The monthly fee can be lower too, depending on the caps your state enforces. For example, California's state cap for a DMP is 8% of your debt balances or $35, whichever is lower. 

When you complete the DMP, your debts are marked as "paid in full" on your credit report instead of "settled."

Debt settlement

Like credit counseling, debt settlement companies negotiate with your creditors to help you pay off your debt quickly, but debt settlement can be a riskier proposition. 

Debt settlement companies may encourage you to stop paying your credit cards and channel your normal payments into a third-party account. This cash redirection has two purposes:

  • Once you stop making your monthly payments and fall behind, your creditors may be more willing to settle. They'd rather get a portion of what you owe via a settlement than nothing at all. 

  • You start building a cash balance in the account that the debt settlement

    company can use to make lump-sum settlement payments to your creditors. 

While a debt settlement company may help you get out of debt quickly, it's best left as a last resort. Letting your debts go unpaid can harm your credit score and also result in judgments against you. Plus, there are no guarantees a debt settlement company can convince your creditors to settle. 

On top of all that, debt settlement fees can be rather high, averaging around 15% to 25% of your settled amount. (Some companies will charge 15% to 25% of your original debt amount.) So, if you settled $20,000 in debt for $10,000, you may end up paying somewhere between $11,500 and $12,500 once the fee is factored in. 

Additional income streams

Another way to pay off debt quicker is to add more income to the mix with a second part-time job or a side hustle. Whether you take on an hourly second job or get into the gig industry — such as freelancing, delivering groceries or driving for Uber — you can use the money you earn to make extra payments on your debts. 

On top of paying off your debts, your hard work at your second job may increase your income enough to lower your DTI ratio significantly. 

Live debt-free, even with a low income

A low income doesn't have to be a sentence to a lifetime in debt. By building a budget and applying one or more of the above debt-payoff tips, you can get out of debt and stay out of debt. 

These debt-payoff options include: 

  • Applying the debt avalanche or debt snowball method

  • Taking out a debt consolidation loan

  • Taking advantage of a 0% APR balance transfer promotion

  • Enrolling in credit counseling

  • Exploring debt settlement

Regardless of which options fit your situation best, it's important to start the process as soon as possible. High-interest credit card debt can quickly become overwhelming, and delaying your payoff plan only adds more interest charges and additional fees. 

Tally can help you with these high-interest credit cards with its credit card repayment app. You may also qualify for Tally's low-interest line of credit1 that you can use to pay off your credit cards, saving you time and money. Plus, you'll make just one monthly payment to Tally, and it’ll distribute your payments to your credit cards using the debt avalanche method.  

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.