How to Get Out of Debt With Bad Credit

Bad credit can cost you thousands of dollars in credit card interest and on auto and home loans. It can also prevent you from qualifying for debt relief-options like low-interest debt consolidation. The good news is there are debt-relief options like nonprofit debt management available to help people with bad credit.

Choose Your Debt Amount

What Is Considered Bad Credit?

Different lenders have different standards for what bad credit is, and the number is more important than the label that goes with it.

The numbers come from two scoring companies, FICO and VantageScore. Both consider payment history, credit use and limits, type of credit, age of credit and new accounts. Each scoring method gives slightly different weight to those categories.

For instance, FICO considers payment history the most crucial factor, counting it as 35% of your credit score. Vantage considers “total credit use, balance, and available credit” to be “extremely influential,” while ranking payment history “moderately influential.” While the way they score may be slightly different, the action you can take to improve your score remains the same.

It is possible to get a debt consolidation loan with a low credit score, depending on the lender. If you take this approach, as mentioned earlier, keep an eye on what the interest rate will be and determine if the loan makes financial sense.

Lenders buy credit scores from FICO and VantageScore, and when you apply for a loan or credit card, you aren’t informed which one it will be.

The two scoring methods also have slightly different ranges for poor to excellent credit:

Very Good/Good740-799661-780
Poor/Very Poor300-579300-499

Consequences of Bad Credit

“Bad credit” means that lenders see you as a high risk to lend money to. Specifically, it means that you’ve probably borrowed too much money and had trouble paying it back, including payments that were 90 days late or more.

Lenders want to know if you’re likely to pay them back. They determine that by your credit score and the credit report that shows your history of borrowing and payments. The lower your score, the worse your credit.

The impact of bad credit on you is that it’s more difficult to get loans or credit cards and the interest rate charged will be higher on both – if you can get them at all. This can affect you in several ways.

  • Buying the house or vehicle you want often depends on loans that offer affordable monthly payments. The higher the interest rate, the more difficult it will be to live where you want or drive what you want. The difference between a 5% and 6.5% interest rate on a $300,000 mortgage is $286 more dollars a month (and more than $100,000 in interest over a 30-year payback).
  • Auto and homeowner insurance companies in most states, have permission to factor your money habits into determining your risk, so poorer credit means higher premiums.
  • You might lose out on the job you want. In most states, employers can factor consumer credit reports in making hiring decisions, even for promotions.
  • Landlords can look at your credit score to determine if they will rent an apartment to you. A poor score may require you to have a co-signer or pay a security deposit, assuming they’re willing to take a risk on you at all.
  • Utilities are permitted to charge deposits to provide service to those with poor credit scores.

How to Get out of Debt When You Have Bad Credit

Bad credit and too much debt are a vicious circle. Bad credit happens when debt gets out of hand, and you have trouble making payments. But it can be tough to get out of debt when you have no money and bad credit.

The best options to reduce or get out of debt if you have bad credit won’t charge a lot in interest and fees and will not generate more debt. In some cases, they can also improve your credit.

There are many ways to reduce debt, including debt consolidation loans, debt management plans, nonprofit debt settlement, for-profit debt settlement, credit card balance transfers and more. Not everyone’s financial situation is the same, which means that what option is best won’t be the same, either.

You’re likely already familiar with the consequences of bad credit – high interest rates on credit cards, auto and home loans, higher deposits for housing and utilities and more. Those challenges can lead to even more debt as you try to keep your head above water.

Now it’s time to become familiar with how to turn that around.

Obtaining Debt Relief with Bad Credit

To get rid of debt, particularly if you have bad credit and little money, there are some steps you can take that won’t cost anything.

No Cost Steps to Reduce Debt

To get control of your finances, create a budget and cut expenses. It’s not glamorous, but it’s a required first step. Put aside money to pay your bills on time. Cut unnecessary expenses. No debt reduction solution will work without taking this step, and you may see an improvement in your credit score as you make payments on time.

Contact your bank or credit union. If you have a checking or savings account, you have a relationship with a bank or credit union. They may be willing to offer a debt consolidation loan or a personal loan. Make sure that the interest is low enough to make sense. If you don’t belong to a credit union, consider joining one. They are nonprofit, so have lower fees and interest.

Borrow from family or friends. This can be a very good option or a very bad one, depending on your circumstances. A family member or friend may charge no interest and be flexible about repayment. On the other hand, emotional and relationship issues that won’t surface when you borrow from a traditional lender may cause issues you didn’t anticipate. If you choose this option, put the terms in writing, stick to the terms and don’t miss payments.

Best Debt Consolidation Options

Some debt reduction options work the best for people with no money and credit that ranges from fair to bad. Those options include:

Debt Management Program – Nonprofit credit counseling agencies can help you put together a budget and discuss options, including a debt management plan. This is not a loan, but a program that will reduce your interest rates and lower your monthly payments while also offering credit counseling that should help you long term.

Debt consolidation loans – Banks, credit unions and online lenders offer personal loans that generally have lower interest than credit card debt.

Debt settlement – This program allows you to pay less than what is owed to settle a debt, but among the many severe consequences are seven years of negative impact on your credit report.

Peer-to-peer lending – Peer-to-peer lending matches applicants online to investors who are willing to take a risk. The good news is standards may be lower than a traditional lender. While there are online debt consolidation lenders that allow credit scores as low as 580, interest rates can be as high as 30-35%, which means you’d just be shifting high-interest debt around rather than solving the problem.

What Is the Best Loan Option with Bad Credit?

There is no “best” option for everyone, and you must weigh your own financial situation when trying to determine what type of loan will be best to pay off your debt.

Debt consolidation loans are personal loans, paid back in installments for a predetermined term, usually 12-60 months. If this option is right for you, the next step is to choose a lender. Shop around for a lender that will offer you the lowest possible interest and the best terms. Again, be sure to do the math and determine that the debt consolidation loan will be a financial benefit, not a financial disaster. Don’t look at the amount you are borrowing as the amount you will pay. Instead, look at the monthly payments, interest, how much you will pay over the term of the loan.

Since a debt consolidation loan is unsecured debt, meaning the loan is not backed by collateral, if you default, a lien could be placed on your wages or property.

The safest loans come from banks, credit unions and peer-to-peer lenders that offer debt consolidation loans. But again, if you have bad credit, you may not qualify, or the interest rate will be too high to make it worthwhile.

Lenders don’t have the same requirements for debt consolidation loans, but they’ll all examine your credit score, income, and debt-to-income ratio to determine the likelihood of you repaying the loan. A 650 or better credit score is likely to qualify you for a debt consolidation loan. Some lenders may accept lower scores but will charge higher interest rates.

If you’re being rejected for debt consolidation loans, considered getting a secured loan, which requires collateral that will cover the loan amount if you default. This will improve your chances of being approved.

Debt Management Plans

A debt management plan through a nonprofit credit counseling agency, like InCharge Debt Solutions, is not a loan. Counselors at the agency work with creditors to get better terms on your debt, including interest rate of approximately 8%. You make a monthly fixed payment to the agency over the 3-5 years of the plan, and the agency distributes the money to your creditors. Your credit score is not a factor in qualifying.

Debt management plans may have an initial negative impact on credit score, but as payments are made, your credit score should improve, and your debt will be paid down. The plans don’t appear on your credit report.

Debt Settlement

This is an enticing form of debt relief because it’s designed to pay less than what you owe to settle a debt. Debt settlement companies negotiate the amount reduced with each one of your lenders, a process that can take 2-3 years. In the meantime, late fees and interest payments add a considerable amount to your balance. Add in fees for the service and the amount saved might be closer to 25% of your original debt. Also, every late fee stays on your credit report for seven years and your credit score can drop by as much as 100-200 points.

Credit Card Debt Forgiveness Program

Credit card debt forgiveness is similar to debt settlement, but there is no negotiating. Lenders agree to settle the debt by accepting 50%-60% of what is owed in 36 fixed monthly payments. A limited number of nonprofit credit counseling agencies offer this program, including InCharge Debt Solutions. There are strict qualification standards, and not all credit card companies participate.


Then, there’s the ‘B’ word. Nobody likes bankruptcy, but if your situation is bad enough, it could be your best alternative. It gives you a second chance to get your finances in order, and it can be done without losing many of your possessions, including your home and car.

There are two major types of bankruptcy, Chapter 7, and Chapter 13. In Chapter 7, your income must be less than the median income for your state. If that’s not the case, you must file Chapter 13 bankruptcy.

In Chapter 7, non-exempt assets – a vacation home, an expensive car, artwork, card collections, jewelry – are sold by a court-appointed trustee and the money is used to pay off unsecured debts. Most assets, however, are exempt from being liquidated, most  notably  your home, car, personal items needed for work, pensions, and Social Security.

In Chapter 13, you create a repayment plan that allows you to keep your assets in exchange for making regular payments to the trustee to pay down debt. The repayment plan lasts for 3-5 years, at the end of which, any unsecured debts (like credit cards) are discharged. As long as you keep up with the payments, you can keep your house and car and other assets.

Your credit score may drop 100-200 points, depending on where it was when you started. Bankruptcy stays on your credit report for 7-10 years, making it more difficult to get credit for a home or car loan in the future.

Debt Relief Options That Require Better Credit

Credit card balance transfer: Some credit cards offer an introductory 0% interest rate to transfer high-interest credit card debt. This is a good option if your credit is still good enough to qualify and if you can pay the card down before the introductory period is over, when the interest rate will increase. However, there is typically a 3%-5% balance transfer fee involved.

Home equity loan: If you have owned your home for several years, you can borrow against the equity – the difference in its value and what you still owe. Interest rates are low, similar to what mortgage rates are. Lenders have qualifying standards, and if your credit is bad, you may not be able to get the loan even if you have equity.

Debt Relief Options to Avoid With Bad Credit

Payday Loans: While these high-risk loans may look quick, easy and tempting, they are not an option for paying off debt, no matter what your credit. Interest rates for these loans are generally 399%, compared to the 25%-30% you pay on credit cards. This option should not even be considered.

Illegitimate Debt Relief Programs: If a program seems too easy to be true, it probably is. Debt-relief programs typically take 3-5 years. Debt relief scammers make unrealistic promises and charge high fees. Check out debt relief programs through the Consumer Financial Protection Bureau, Better Business Bureau, or local state attorney’s office.

Using Your 401(k): Your retirement fund looks like it could solve your problems, but it’s likely to lead to a bigger problem. You probably want to quit working someday, and that retirement fund is the money you’ll need to do it. Using it for short-term gain can bring long-term woe.

Risk-Based Pricing

Risk-based pricing is when lenders adjust interest rates by estimating the risk to them of the borrower not paying the loan back. Someone with bad credit is considered a high risk, and therefore their loan has a high interest rate. A low-risk borrower receives the lowest interest rates.

Every lender has its own formula for calculating risk, but most include credit score, outstanding debts, income, job status and debt-to-income ratio in arriving at the risk factor. Much of that information comes from your credit report.

If lenders gave you unfavorable terms on a loan and used your credit report in making their decision, you should receive a Risk-Based Pricing notice. If you receive one, you may contact the agency that supplied the credit report to verify that all the information in the report was accurate.

How to Get a Loan with Bad Credit

If you have bad credit and are looking for a way to reduce your debt, taking the time to improve your credit score will help. A better credit score can be the difference between being approved for a loan or rejected. It will also mean a lower interest rate, which, in turn, means lower monthly payments. Raising your credit score by 20-30 points can mean the difference between being a bad credit risk and a good one.

Working to raise your credit score has another advantage – it can also lower your debt because you’re making payments on time, decreasing credit utilization and more. So, when you do apply for a loan, it may end up borrowing a lower amount than what you initially thought it would be.

Getting a debt consolidation loan with bad credit is difficult, because the rates will be so high that there’s no advantage. If you can get your credit score above 650, you should qualify for a debt consolidation loan enabling you to roll your high-interest credit card debts into a single loan at a lower interest rate.

Best Bad Credit Lenders

It may take some searching, but it’s possible to get a loan with less-than-desirable credit. As mentioned before, start with local banks and credit unions, but there are several online lenders that help those with bad credit.

Here are some places to look for bad credit loans:

  • Lending Club: No minimum credit score requirement, and you can apply with a co-borrower. No application or prepayment fees. APRs from 6.34% to 35.89% percent on debt consolidation loans from $1,000 to $40,000.
  • Upgrade: Minimum credit score is 560. APR range of 6.95% to 35.97% for loans from $1,000 to $50,000.
  • Upstart: No minimum credit score requirement. APR range of 5.4% to 35.99% for loans from $1,000 to $50,000.
  • BadCreditLoans: APR range from 5.99% to 35.99% for loans from $500 to $10,000.
  • Avant: Most customers who get loans have a score above 600. APR between 9.95% and 35.99% for loans from $2,000 to $35,000.
  • OneMain Financial: APR range from 18% to 35.99% for loans from $1,500 up to $20,000.
  • PersonalLoans: Minimum credit score of 600. APR range from 5.99% and 35.99% for loans from $1,000 to $35,000.

» Learn More: Loans for Seniors with Bad Credit

How to Monitor Your Credit Score

Knowledge is power, and there’s no better weapon against bad credit and debt than understanding your own finances and figuring out where the problems are. The best way to do that is to monitor your credit report.

Your credit report is available for free once a year from each of the three credit reporting bureaus Experian, TransUnion and Equifax. It’s a good idea to get all three reports, since not all creditors report to all three.

You can receive a free report by visiting or call or call 1-877-322-8228. It costs $9.95 to get your credit score from the bureaus, but many banks and credit card companies offer free weekly credit score monitoring to customers. There are also free online services that offer free credit scores, just search for “free credit score” online. Your credit card can change weekly as you use, and make payments on, credit cards.

“The first thing any lender wants to know is whether you’ve paid your credit accounts on time,” Can Arkali, principal scientist for analytics and scores at FICO, said. “That negative information has a considerable impact on your credit. The important thing to keep in mind is that the impact of negative payment information will be less damaging over time if you keep your credit obligations in good standing.”

One of the things you want to look for is whether a “hard inquiry” is listed on your credit report. This happens when you apply for a credit card or other loan, such as a mortgage. If lenders find a lot of hard inquiries, it suggests you may be financially struggling, making you a borrowing risk. To minimize the number of hard inquiries on your report, don’t apply for multiple credit cards in a brief time period.

How to Improve Your Credit Score

It’s not rocket science: The higher your credit score, the more likely you are to be approved for a loan and the better interest rate you can qualify for. That can be the difference between getting the home you want and settling for something else, from living paycheck to paycheck or having financial peace of mind.

Here are some things you can do to improve your credit score.

  • Clean up your credit report: If there are errors or debts that aren’t yours on your credit report, you can write a dispute letter to creditors, collection agencies and reporting bureaus and have it fixed. You can also attach a note explaining a bad credit situation that shows on your report.
  • Make on-time payments: Your history of on-time payments is the biggest factor in calculating your credit score. Set up automatic payments online to be sure you pay on time. Make the automatic payment for the minimum, if that’s all you can afford, then pay more, when you can. You can make as many payments a month as you want.
  • Keep card balances low: Another factor that counts for 30% of your credit score is credit utilization – the amount of credit you have available vs. what amount you use. Don’t spend more than 30% of the credit limit on your cards and pay as much of your balance as possible every month.
  • Don’t close unused credit card accounts: It’s great if you stop using a credit card, just don’t close the account. Keeping the card helps your credit score in two ways: it adds to the length of credit history and the zero balance also figures into your credit utilization ratio.
  • Make a monthly budget: Keep a budget, in whatever way you’re comfortable with. It can be in a notebook, through one of the several budget apps available, an online spreadsheet or something in between. Determine all your income for the month and how much you will pay for your bills. This helps you keep your monthly credit card and other payments on track. Review it monthly and adjust when possible so you can make more debt payments.
  • Credit counseling: Contact a nonprofit credit counseling agency for advice and explanation of debt-relief options. This is often an overlooked advantage you get for FREE!. A credit counselor at an accredited nonprofit agency will review your financial situation and help you set up a budget that works with your financial situation. The counselor will also discuss debt payment options with you. This service costs nothing. Take advantage of it.

Challenges of Bad Credit

Obviously, having bad credit combined with debt creates a catch-22. Everything is more expensive for you because of higher interest rates and fees, stretching your already limited disposable cash to the breaking point.

If you can’t overcome the challenges of bad credit while trying to get rid of debt, it may be time to talk to a credit counselor at InCharge Debt Solutions. A counselor will help give you some perspective and help you create a strategy to improve your credit and reduce your debt.

The certified counselors at InCharge are trained to educate consumers on how to manage their money effectively and offer suggestions about the best options for eliminating debt. The options they’ll discuss may include anything from a debt management program to debt consolidation loan or nonprofit debt settlement.

By law, the counselors at nonprofit agencies are required to offer advice that is in the client’s best interest. Call the credit counselors, or fill out the Get Started form, at InCharge Debt Solutions and start on the path to turning around your bad credit and reducing your debt.

About The Author

George Morris

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.


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