How to Get Out of Debt Without Hurting Your Credit

Last Updated: December 4, 2022 References Approved

It’s possible to pay off debt without harming your credit. In fact, the faster you pay off your debts the more your credit score will improve. Ideally, you should come up with a budget and pay off your debts as soon as possible. If you need help, enroll in a debt management plan through a credit counselor. You might also consolidate your debts. However, the last two options will temporarily harm your credit.

Method 1

Method 1 of 4:

Paying Off Your Debts Quickly

1
Create a budget. To pay off debt, you need to live within your means.^{[1]
X
Expert Source

Brian Stormont, CFP®
Certified Financial Planner
Expert Interview. 21 July 2020.} Ideally, you should free up as much money as possible to contribute to your debts. Sit down and create a budget:
- List fixed expenses. These are things that cost the same each month: rent/mortgage, health insurance, car payment, food, etc.^{[2]
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- Now identify variable expenses. Variable expenses will differ each month. Variable expenses are also typically luxuries, such as meals out, gym memberships, and Netflix.
- Try to reduce your variable expenses as much as possible, and contribute the money saved to your debts.^{[3]
  X
  Expert Source
  
  Brian Stormont, CFP®
  Certified Financial Planner
  Expert Interview. 21 July 2020.}
2
Find a part-time job. In addition to reducing expenses, increase your income. Find a part-time job, or freelance on the side. Think of it as an opportunity to explore new interests while making a little money to pay off your debts.
- The money from a part-time job can add up quickly. For example, you might get a job for $10 an hour. If you work 20 hours a week, you can earn an extra $200 before taxes. Over the course of a full year, you will have earned about $10,000.
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3
Sell your possessions. You can free up money by selling unused possessions. In fact, you might be able to sell whatever you bought that got you so into debt. Go through your home and identify anything that you can live without. Sell it on eBay or in a garage sale.
- Apply all proceeds to your debt balances.
4
Ask for a lower interest rate. You might be able to get a lower rate by calling up the company and asking. Although you aren’t entitled to a lower rate, it doesn’t hurt to ask.
- When you call, identify yourself and how long you have been a customer. Ask if you can get a lower APR so that you can continue to work with them.
- For example, say, “Hi. My name is Michael Jones, and I’ve been with you for seven years. I’ve been a good customer and would really like a lower interest rate. It seems high for me. Can you offer me a lower rate so I can continue to do business with you?”
5
Choose which debt to tackle first. If you have multiple credit cards, you should commit to paying off one first. Use one of the following methods:^{[4]
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- Pay off the card with the highest APR. This card is costing you the most in interest, so paying it off first will save you money. You pay the minimum on all other cards and then contribute all remaining cash to the card with the highest APR. Once you pay that off, you focus on the card with the next-highest APR.
- Pay off the card with the smallest balance. This will cost you more. However, it might give you momentum. As you pay off one card, your confidence and commitment increases.
6
Keep accounts open even when paid off. Your credit score depends in part on the length of your credit history and the percentage of credit you use. Closing an account will negatively affect each factor and lower your credit score.^{[5]
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- Of course, you shouldn’t start running up debt again. If you think you will be tempted to spend, then close the account. Your credit score will get dinged, but the damage will be less than if you rack up bills again.

Method 2

Method 2 of 4:

Enrolling in a Debt Management Program

1
Find a credit counselor. If you can’t create a budget or feel overwhelmed, then meet with a credit counselor. The counselor can help you come up with a repayment plan (called a “debt management program”). You can find a counselor in the following places:
- Stop into a local credit union or university and ask. Often, they operate non-profit credit counseling services.^{[6]
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  Trustworthy Source
  Federal Trade Commission
  Website with up-to-date information for consumers from the Federal Trade Commisson
  Go to source}
- Your housing authority, military base, or branch of the U.S. Cooperative Extension Service might also offer services as well.
- Look for credit counselors at the U.S. Trustee’s website: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111. These counselors have been approved to counsel people considering bankruptcy.
2
Attend counseling. At the session, you and the counselor should discuss your debt and consider your available options, including enrolling in a debt management program.^{[7]
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Research source} Ask the counselor any questions you have and don’t feel pressured into immediately enrolling immediately.
- Discuss what to do if most of your debt is “secured.” Secured debts tied to some asset. For example, a car loan is secured by the car itself. If you default, your lender can seize the asset.
- Debt management plans work only with unsecured debts, like credit cards, personal loans, and medical debt. However, your credit counselor might have ideas about how to manage your secured debts.
3
Check how much the debt management program costs. You will probably have to pay to enroll in the program and also a monthly fee.^{[8]
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Research source} Get a quote in writing. In 2014, the average cost was $24 a month.
- Perform proper research before enrolling in a debt management plan. Check with a local consumer protection agency to check whether anyone has filed complaints against the company.^{[9]
  X
  Trustworthy Source
  Federal Trade Commission
  Website with up-to-date information for consumers from the Federal Trade Commisson
  Go to source}
4
Set up a debt management plan. Your counselor will contact your creditors and try to get late fees and penalties waived. They may also get the interest rate reduced, which will make getting out of debt easier.^{[10]
X
Trustworthy Source
Federal Trade Commission
Website with up-to-date information for consumers from the Federal Trade Commisson
Go to source} The plan can last a long time, e.g., for several years.
- Generally, you will write one check to your credit counselor who turns around and pays your creditors.
- Using a debt management plan shouldn’t negatively affect your credit score. However, it will show up on your credit report.^{[11]
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5
Realize you can’t obtain new credit. As part of debt management, your creditors will close your accounts.^{[12]
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Research source} As a result, it will be hard for you to obtain new credit while you are paying off your debt.
- Even if you are able to get a loan while in a debt management program, your creditors might withdraw any concessions they have made (such as waiving late fees or reducing your APR).
- Get a list of your obligations in writing and stick to them.

Method 3

Method 3 of 4:

Consolidating Loans

1
Find a credit card for a balance transfer. You can consolidate your debts onto a credit card with favorable terms, such as a low APR. In fact, you can often get a 0% APR introductory period that generally lasts 12-18 months.^{[13]
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- One of your current credit cards might offer balance transfers. Look there first. Make sure the card doesn’t already have a balance.
- If you don’t have a current card, you should shop for one. Generally, you’ll need a score of around 700 to get a balance transfer credit card.
- Generally, the low-interest rate will go up substantially after the 12-18 month period. Make a note in your calendar 2 weeks before that date so you can close your credit card and open a new one.^{[14]
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  Expert Source
  
  Benjamin Packard
  Financial Advisor
  Expert Interview. 11 March 2020.}
2
Obtain a personal loan instead. You can also consolidate debts with a personal loan. You can obtain a personal loan at a bank or credit union, though credit unions are more willing to lend to someone with poor credit. You can pay off your smaller loans with the personal loan.
- When you apply, the lender will pull your credit history. This “hard pull” will reduce your credit score slightly for about a year.
- Avoid taking out a home equity loan or line of credit, since you’ll be at risk of losing your home if you can’t make payments.
- In fact, avoid taking out a “secured” personal loan backed by any sort of collateral. Only seek an unsecured personal loan.
3
Make timely payments. You’ll lose the introductory APR on a balance transfer if you don’t make the minimum payment on time.^{[15]
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Research source} Accordingly, set up a system that reminds you when a payment is due. For example, your bank might send you text messages or emails if you enroll.
4
Pay off debt as soon as possible. Your credit score will climb as you lower your overall debt burden. Commit to using all available money to pay off your debts. Set up a budget and pick up a part-time job to speed up the repayment process.
- If done right, debt consolidation should free up money that went to interest payments on your loans. Now contribute that money to your principal.
- Don’t spend this extra money on luxuries, which is a common trap. You’ll only remain in debt if you do.

Method 4

Method 4 of 4:

Avoiding Bad Options

1
Refuse new offers of credit. You might think the best way to manage debt is to obtain more credit. This is a huge mistake. Continuing to open credit cards or taking personal loans will only cause you to fall further in debt.
- Also, creditors will assume you are in financial trouble if you apply to a bunch of credit cards at once. This will hurt your credit score.
- An exception exists if you are getting a card or taking a loan to consolidate your other loans. In this situation, paying off your debt quickly with debt consolidation is worth the momentary credit hit.
2
Don’t attempt debt settlement. With debt settlement, you stop making payments to your creditors. Instead, you try to build up enough cash to offer your creditors a lump sum payment. If they accept the payment, they agree to settle your debt for less than face value.^{[16]
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Trustworthy Source
Federal Trade Commission
Website with up-to-date information for consumers from the Federal Trade Commisson
Go to source}^{[17]
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Expert Source

Brian Stormont, CFP®
Certified Financial Planner
Expert Interview. 21 July 2020.}
- However, your credit score will tank because you have stopped making payments.^{[18]
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  Expert Source
  
  Brian Stormont, CFP®
  Certified Financial Planner
  Expert Interview. 21 July 2020.}
- Your creditors might also sue you for failing to make timely payments. If they win the lawsuit, they can garnish your wages or seize your property.
- On top of everything else, your creditors might not accept your lump sum offer. In that situation, all you have accomplished is harming your credit.
3
Avoid bankruptcy. Bankruptcy will also hurt your credit score. The exact impact will depend on how high your score was initially.^{[19]
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Research source} However, most scores drop 130-240 points. Furthermore, bankruptcies stay on your credit report for years:
- A Chapter 7 will stay on your report for 10 years.
- A Chapter 13 will stay on your report for seven years after you complete the repayment plan.

Expert Q&A

Question

How long does debt settlement affect your credit?

Brian Stormont, CFP®
Certified Financial Planner
Brian Stormont is a Partner and Certified Financial Planner (CFP®) with Insight Wealth Strategies. With over ten years of experience, Brian specializes in retirement planning, investment planning, estate planning, and income taxes. He holds a BS in Finance and Marketing from the University of Denver. Brian also holds his Certified Fund Specialist (CFS), Series 7, Series 66, and Certified Financial Planner (CFP®) licenses.

Brian Stormont, CFP®

Certified Financial Planner

Expert Answer

Debt settlement can affect your credit rating for years, which is why it's not a great option to consider.
Question

Does credit consolidation ruin your credit?

Brian Stormont, CFP®
Certified Financial Planner
Brian Stormont is a Partner and Certified Financial Planner (CFP®) with Insight Wealth Strategies. With over ten years of experience, Brian specializes in retirement planning, investment planning, estate planning, and income taxes. He holds a BS in Finance and Marketing from the University of Denver. Brian also holds his Certified Fund Specialist (CFS), Series 7, Series 66, and Certified Financial Planner (CFP®) licenses.

Brian Stormont, CFP®

Certified Financial Planner

Expert Answer

Not necessarily! Debt settlement is actually much more damaging to your overall credit score. If you're stuck between debt consolidation and settlement, consolidation is definitely the better option.