How to Pay Off Debt If You Have Bad Credit

By Gabriel Rodríguez MONEY RESEARCH COLLECTIVE

March 28, 2025 10:35 AM

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Everything financial can feel like a challenge when you have bad credit. With high interest rates, limited loan options and reduced bargaining power, overcoming debt may feel like an uphill battle. But even with bad credit, there are strategies —such as debt relief— that can help you manage and eliminate debt while rebuilding your financial health.

Read on to explore practical steps you can take to pay off debt and regain control of your finances, improving your credit score along the way.

Assess Your Financial Situation

Before you begin paying off debt, you need a clear picture of where you stand.

The first step should be to list all your debts. Write down all your outstanding balances, minimum payments, interest rates and due dates to determine which debts to prioritize. To help with the tracking, consider using a spreadsheet or a budgeting app.

Next, add up all your monthly debt payments and divide them by your monthly income to calculate your debt-to-income ratio (DTI). A high DTI can signal financial distress to lenders — conversely, a low DTI may increase your chances of securing additional credit and competitive loan rates.

Finally, review your budget to identify areas where you can cut unnecessary expenses and redirect more money toward debt repayment. Focus on your discretionary spending, such as dining out, subscription services and entertainment, to find ways to save.

Debt Repayment Strategies for Those with Bad Credit

Repayment strategies for people with bad credit are not markedly different from ones for those with good credit.

The main difference is that people with good credit have access to lower interest rates and better refinancing options making debt consolidation easier. In contrast, those with bad credit must rely more heavily on budgeting and alternative repayment strategies like debt management plans or side income to tackle their debt.

Prioritize high-interest debt with the debt avalanche method

The debt avalanche method involves paying off your debts with the highest interest rates first while making minimum payments on the other ones. This strategy minimizes the total interest paid over time, helping you become debt-free faster.

To implement this method, keep making minimum payments on all debts, applying any extra funds toward the debt with the highest interest rate. Once that debt is out the window, move on to the next highest-interest debt. Repeat this process until all of them are paid off.

Use the debt snowball method to stay motivated

Sometimes, all we need is a little motivation to keep us on track. The debt snowball method is meant to create quick wins that translate into psychological boosts by paying off your smallest debts first. This works well for those who need encouragement and tangible progress to stay on track.

Start by listing your debts from smallest to largest balance. Then, pay as much as possible toward the smallest debt while making minimum payments on others. Once the smallest debt is paid off, move to the next smallest debt, and continue until all of your debts are cleared.

Consider a debt management plan

A debt management plan (DMP) is a structured repayment program offered by nonprofit credit counseling agencies that can help you pay off debt by consolidating multiple payments into one monthly installment. Most DMPs take three to five years to complete, providing a structured approach to debt repayment.

After enrolling, a credit counselor will review your finances and create a repayment plan tailored to your situation. The agency negotiates with creditors on your behalf to secure lower interest rates and potentially waive certain fees. All you have to do is make a single monthly payment to the agency, which distributes the funds to your creditors.

Negotiate with creditors for better terms

If you’re struggling with debt, contacting your creditors to negotiate better terms can be an effective strategy. Many creditors are willing to work with borrowers facing financial hardship to reduce interest rates, modify payment schedules or waive fees.

Here are some tips to improve your chances of success with this strategy:

Start by calling your creditors and explaining your financial difficulties.
Request specific relief methods, such as a lower interest rate, reduced monthly payments or the eliminating fees.
Be polite — but persistent — and go into the conversation with detailed information about your finances to show your need for assistance.

Look into secured loans or credit-builder loans

Secured personal loans, which are backed by collateral like your home or auto title, may provide lower interest rates even with bad credit. Alternatively, credit-builder loans help establish a positive payment history while gradually improving your credit score.

Other Ways to Pay Off Debt With Bad Credit

The methods listed above aren’t the only ways to pay off debt with bad credit. However, we suggest you consider the following strategies cautiously due to the additional investment or risk involved.

Side hustles and extra income streams

Earning extra income through side hustles can accelerate debt repayment, especially for those with limited financial flexibility. Gig work such as ride-sharing or food delivery services, freelancing in fields like writing or graphic design and selling handmade crafts online can help generate additional funds to put toward outstanding balances.

On the other hand, side hustles require a time commitment that can lead to burnout, especially for those already working full-time. Some gig jobs also come with upfront costs, such as fuel and vehicle maintenance for ride-sharing or marketing expenses for selling goods online.

Debt settlement – when (and when not) to consider it

Debt settlement involves negotiating with creditors to accept a reduced lump-sum payment. While this can lower overall debt, it can also damage your credit score and result in tax liabilities.

You might consider debt settlement if:

You have significant unsecured debt: Debt settlement is most effective for large amounts of credit card debt, medical bills or personal loans.
You are struggling to make minimum payments: If you’re consistently behind on payments and facing potential default, settlement may provide some much needed relief.
You want to avoid bankruptcy: While debt settlement impacts your credit, it is generally less damaging than filing for bankruptcy.

You should avoid debt settlement if:

You have secured or government debt: Mortgages, auto loans and other secured debts are not eligible for settlement. Student loans and tax debts typically cannot be settled through this method, either.
You can manage payments through other methods: If you can afford minimum payments or qualify for a debt management plan, those options may be less harmful to your credit.
You want to avoid additional damage to your credit score: Debt settlement can significantly lower your credit score and remain on your credit report for up to seven years.

Bankruptcy – the nuclear option

Bankruptcy is often considered a last resort for those facing overwhelming debt, as it provides a legal path to financial relief but is saddled with significant long-term consequences. There are two primary types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy can discharge unsecured debts, such as credit cards and medical bills, but may require the liquidation of certain assets to repay creditors. On the other hand, Chapter 13 restructures debt into a manageable repayment plan spanning three to five years, allowing individuals to retain their assets while gradually settling their obligations.

While bankruptcy can offer a fresh financial start, it stays on your credit report for up to 10 years, making it harder to secure loans, mortgages or even certain job opportunities. Given its impact, it’s advisable to pursue bankruptcy only after exhausting all other debt payoff options.

Understanding the Impact of Bad Credit on Debt Repayment

Bad credit typically refers to a credit score below 580, according to FICO. When your credit score is low, lenders view you as a high-risk borrower, making it harder to qualify for loans with favorable terms. This can result in higher interest rates on credit cards and loans, difficulty securing debt consolidation loans and limited options for refinancing.

Bad credit can also impact other aspects of your financial life, including your ability to rent an apartment, get approved for utility services without a deposit, or even secure employment in some industries. Addressing your debt early is crucial to prevent your credit score from declining further, which could lead to even fewer financial opportunities in the future.