How to Get Out of Debt with Bad Credit
If your credit rating has been ruined by financial mistakes and mishaps, then you might have noticed that it’s difficult to access important financial options such as mortgages and loans.
Even if you’re currently not in debt, having a poor credit rating means that you won’t be able to access certain financial services, thus limiting your options for future growth.
One of the most difficult situations to get out of is if you have bad credit and are also in debt.
In many cases, debts can be dealt with by using debt consolidation loans.
However, since this is a financial product, people with bad credit ratings can’t exactly get a loan.
It can feel like you’re between a rock and a hard place when you’re in debt and have a poor credit rating.
Luckily, there are some effective ways to help you get out of that debt problem, even if you have a poor credit rating.
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Identify if you have bad credit or not
If you’re being refused for loans and other financial services, then it’s usually a clear sign that you have a bad credit rating.
However, it’s still a good idea to request a full credit history report so that you can see what has contributed to your poor credit score.
Most companies that you have credit with will outline the problems that they’ve had with you.
For instance, some may say that you’ve defaulted on payments and others will state that you always make late payments.
There’s a chance that some of these disputes are outdated or incorrect.
If that’s the case, you may be able to get your credit report corrected.
This might be enough to help you achieve a better credit score so that you can start applying for financial services again.
However, if you’ve confirmed you have a bad credit score and know the reasons for it, you can start to work on your finances so you can fix your record.
Identifying why you’re in debt in the first place
If you’re in debt, it’s important to identify why you’re in debt in the first place.
Perhaps you’ve made a few poor financial decisions in the past or maybe you’re living beyond your means.
Perhaps you’re having difficulty coping with your financial situation because you’re not making enough money, or maybe you’re spending far too much of your income on entertainment and luxury expenses.
To help you identify why you’re in debt, there are a couple of simple processes to follow:
- Calculate how much income you get each month;
- Record every one of your expenses from now on, categorizing them by the date that you made the purchases;
- Look at how much money you’re spending in relation to how much you’re making;
- Consider looking at past purchases to see where those lines of credits came from and why they turned into debt;
- If you’re spending more money than you’re making, then you’re likely living beyond your means and should drastically cut down on non-essential expenses;
- However, if you’re struggling to pay for essentials and make far too little, it could be a problem with your living conditions and you may need to seek financial support.
If you’ve done everything you can to reduce your expenses but still don’t make enough to cover basic living costs without taking out loans or borrowing money, then you may need to consider a more drastic option to help you clear your debts such as filing bankruptcy.
Luckily, bankruptcy can leave you with essential possessions including your vehicle and your tools of the trade.
In return, you could clear all of your debts even with bad credit and start fresh with your finances.
This is just one option that is available to you, so don’t hesitate to get in touch with us if you’re interested in learning more about how you can get out of debt even with bad credit.
However, if most of your expenses are due to entertainment, you may want to consider budgeting for expenses and trying to avoid any unnecessary costs.
For instance, you could start by cutting off any subscription services that aren’t essential and practising more frugal habits such as buying a second-hand car, looking at refurbished tech items or simply avoiding any wasteful spending on items you don’t need.
This is the first step to getting out of debt with bad credit.
Even if you were able to clear your debts, it’s not going to help if you’re unable to develop better habits.
If you still try to live beyond your means, borrow money and be wasteful with your income, then you’re going to end up in the same situation again later in the future.
Identify why you’re in debt and how you can avoid it in the future, then you’ll have a much easier time securing financial freedom.
Identifying what caused your poor credit rating
Next, you also need to identify what caused your poor credit rating in the first place.
Here are some of the most common causes of a bad credit rating:
- Declaring bankruptcy;
- Making late payments for loans or lines of credit;
- Not using an account;
- Defaulting on loans;
- Home foreclosure;
- Maxing out credit cards all the time;
- Closing credit cards that need to be paid off;
- Opening lots of credit lines;
- Applying for several loans or cards at once;
- Failing to communicate with lenders over financial troubles.
These are some of the most common reasons why your credit rating could be bad.
Take note of which of these apply to you and then try to avoid it in the future.
For instance, try to always make payments on time if possible and never max out your credit cards.
Instead, aim to keep credit limits at around 50% and make sure you communicate with lenders if you’re unable to make a payment on time.
Putting together a plan to get out of debt with bad credit
Now that we have a better understanding of why you’re in debt or have a bad credit rating, we can start to talk about effective methods to help rid yourself of debt.
Bad credit loans can work if you’re making enough income
One of the most common ways for people with a bad credit score to pay off their debts is to use a loan for bad credit.
Unfortunately, most of these have very high-interest rates and you’ll end up paying more for clearing your debts.
However, if you’re making enough money to offset the cost of this interest, then you might find this to be the most effective option.
However, this would require you to suddenly earn a much higher salary in order to pay off both the high interest and your existing debts.
Debt relief programs are the most common option
Debt management programs are an effective way to help you rebuild your credit rating so that you can relieve yourself of debts in the future.
This program essentially consolidated your debts into a single loan, avoiding all the potential interest that you pay from being in debt to several different lenders.
If you’re able to make regular payments to this consolidated loan, your credit rating will rebuild at an accelerated rate.
This means you don’t need to pay high-interest rates and will also mean you can rebuild your credit rating quickly.
Consumer proposals and bankruptcy can also work
A consumer proposal and bankruptcy work in similar ways because they both aim to give you real debt relief instead of just consolidating your payments or borrowing more money.
These options will help you clear your debt much faster than any kind of personal loan or debt relief program, but they will incur long-term penalties to your credit rating.
However, if getting out of debt is your primary concern, then consumer proposals and claiming bankruptcy can work with the right assistance from a financial specialist such as Bankruptcy Canada. Just keep in mind that these options do not help you repair your bad credit score.
If you’re in need of more information or want to learn more about debt solutions with bad credit, don’t hesitate to contact us today.
Our specialists will be more than happy to guide you to a debt-free life and will offer impartial advice on how you can achieve financial freedom in the future, even if you’re currently struggling with debt and bad credit.
Bad credit can happen to almost anyone.
Remember that there are solutions available regardless of your financial situation and there are specialists that are ready and waiting to help you.
Just remember that even if you do wipe your debts and clear your credit history, you’ll end up in the same position in the future if you don’t identify why you have a bad credit score and why you’re in debt in the first place.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?