How To Get Out of Debt with Bad Credit

A poor credit score often prevents eligibility for those who need debt relief the most. Nonprofit debt management provides a way out of debt without considering credit scores.

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Severe debt and bad credit are a recipe for nightmares. If you have bad credit, it’s hard to climb out of debt. If you have severe debt, it’s hard to establish the good credit you need for solutions that can make dealing with debt a whole lot easier, like debt consolidation loans.

This can make trying to get out of debt with bad credit feel like an endless cycle, but bad credit is more common than you might think. About 30% of credit users have bad credit scores, according to That’s 68 million people. Surely, they can’t all be doomed to a lifetime of high interest rates and fees?

They are not, and neither are you.

No matter how deep you are in debt, you have options for dealing with it. The higher your credit score, the more options you have.  To get out of debt with bad credit you need to know what options your credit score affords you. This way you can take the best approach,  the one that will save you the most time and money.

What is a Bad Credit Score?

If knowing the options your credit score affords you is the first step to getting out of debt, you may be wondering: “How bad is my credit score, anyway?”

The short answer: anything from 300 to 559 is considered poor. Anything between 560 and 669 is considered fair, and anything above 670 is considered good. The 740 to 799 range is very good, and if your score is above 800, you’re reading the wrong article.

The long answer: You have multiple types of credit scores. The three major credit bureaus, Experian, Equifax and TransUnion, all keep a score that will vary slightly from one another. However, 90% of lenders are more interested in your FICO score, or scores, rather. You have more than one, depending on who’s asking and how much you’re trying to borrow. In fact, FICO has offered more than 60 separate scores for borrowers since 2011, according to the Consumer Financial Protections Bureau (CFPB).

Lenders often use specific models tailored to their industry to determine your creditworthiness. A lender may use your FICO Auto Score for a car loan or your FICO Bankcard score for a credit card. Slight variations in the scoring models explains why you may be approved for the one and denied for the other.

All that being said, your base FICO score or one of the educational scores from TransUnion, Equifax or Experian can give you a good idea where you stand.

It’s important to understand how your daily purchases and lifestyle affect your credit score. If you improve your credit score from bad to fair a host of debt relief options open up before you.

Factors that determine your credit score:

  • Payment history: Missing payments is the surest way to damage your credit score. This accounts for 35% of your score. How late the payment is (a week vs a month vs a year), the frequency of late payments and how long since your last late payment, are all taken into account. If you have one late payment from four years ago it’ll mean much less to the credit bureaus than one from last month.
  • Credit utilization: This counts for 30% of your credit score. The credit bureaus want to know you’re using your credit responsibly. FICO sees a maxed-out credit card as the sign of a rash consumer. Keep your usage well below your limits. Spread your purchases across your lines of credit and use no more than 30% (e.g. $300 on a $1,000 credit limit) of the available credit on each line.
  • Credit history: Don’t close those old cards! Credit History accounts for 15% of your credit score. Even if you’ve stopped using a card, hold on to it. The longer you’ve had an open line of credit, provided you’ve kept up with the payments, the better it reflects on your score.
  • Credit mix: This one is worth 10% of your credit score. FICO looks at your credit cards, auto loan, mortgage, student loans and rewards you for having a diverse financial portfolio. Don’t apply for these all at once. You’ll want to make these acquisitions gradually, otherwise you’ll appear desperate for credit.
  • New credit: If you’ve recently opened a new credit card you might have noticed a positive spike in your credit score. New credit accounts for 10% percent of your score, but the same rules from above apply here as well. Don’t apply for too much credit at once.

How to Improve Your Credit Score

The best way to improve your credit score is to make your payments on time and to keep your credit utilization in check (spend less than 30% of available line of credit). These two factors make up the bulk of your credit score.

Applying for new credit and diversifying your portfolio can help, but you can’t go applying for new loans every day or week. There is a balance you must keep in order not to alert the credit bureaus.

Instead, do whatever you can to stay on top of your payments. This often means you’ll have to budget and cut expenses. This may mean eating out less or traveling less for a time. It may mean buying generic over name brand products, but all of it will pay off when you see your credit score going up.

Bad Credit Debt Relief Options

Rebuilding a credit score may take months or years. Currently, there are no recommended “get out of debt in a day” hotlines to call for help. However, there are always steps you can take to get out of debt no matter how bad your credit score is.

Here are a few options to consider.

Debt settlement

A debt settlement lets you settle your debt for less than what you owe. You can hire a company, or lawyer to negotiate with the lender, or you can do it yourself. Some debt settlement companies claim they can settle your debt for 50% less than what you owed, but, of course, they’ll want their cut, too. They’ll usually charge 20%-25% of the amount saved.

Clearly, there are a few drawbacks to debt settlement, otherwise, why pay debts in full in the first place?

First off, it can take two to three years to settle the debt. Debt settlement companies will tell you to stop making payments on credit cards while they negotiate, but that doesn’t stop interest and late fees from piling up.

Also, lenders and collection agencies are not required to accept your offer. If they do accept your offer, they’ll report back to the credit bureaus and you’ll have a negative mark on your credit report for seven years.

Let’s not forget about Uncle Sam, either. The IRS counts forgiven debt as income. So, if you settle a 20,000 debt for 10,000, you’ll still owe the IRS taxes for that $10,000 you got out of paying.

Debt consolidation

A debt consolidation loan is a loan you use to pay off debts. It lets you streamline multiple debts into one convenient monthly payment. If you can get a debt consolidation loan at a lower interest rate than what you’re paying on high-interest debt like credit cards , you will save a lot of money.

If you have good credit, you can get a debt consolidation loan at around 7% APR, but if you’ve read this far, your credit probably ranges in the “fair” to “not-so-fair” range, which means paying interest rates in the 15%-20% range.

The lower your credit score is, the less a debt consolidation loan will make sense for you as a way out of the hole. Lenders will either be unwilling to give you yet another loan, or they’ll offer you one with crippling interest rates attached.

If the interest rates are so high that they rival or exceed the rates of your current debt than it’s time to look at another option than a bad credit debt consolidation loan.

Debt management programs

Most options for getting out of debt seem to cater to people with good credit or little debt. Debt management programs offer an avenue for people with really bad debt and not-so-good credit. They are a good place to turn when your financial situation has become either dire or so convoluted, you’re unsure of the next best step.

A debt management program can provide credit card consolidation without the loan. You make one monthly payment to the debt management agency and they, in turn, repay your creditors.

An agent can negotiate new terms with your lenders that should result in lower interest rates and possibly dropped fess. The agent can also go over your finances and point out ways to save that you may have missed or taken for granted.

At the very least, a debt management program will provide a level of order in what may otherwise be an uncomfortable and chaotic situation.

Home equity line of credit

If you own a home, you should look into a home equity line of credit or HELOC. A HELOC is a line of credit that matches up to 80% of the equity in your home.

Interest rates are lower for HELOCs than personal loans, since your home is being put up for collateral. The obvious downside here is if you default on the loan than the lender can foreclose on your home.

Lenders will also take your credit score and payment history into account when deciding on loan terms. So, it may be best to work on your credit for a few months before going forward with this one.


Filing for bankruptcy is never the advice people want to hear, but depending on your situation, it may be the wisest option.

It should, however, be your last option.

Don’t take filing for bankruptcy lightly. Your credit score after bankruptcy will plummet. Loans will be hard if not impossible to come by, and the stain of bankruptcy will remain on your credit report for seven to 10 years.

Even with these negative aspects considered, bankruptcy can give you a fresh start by allowing you to rebuild your financial portfolio. The whole point of bankruptcy is to give people a second (albeit hard-fought) chance, not to punish them.

About The Author

Bents Dulcio

Bents Dulcio writes with a humble, field-level view on personal finance. He learned how to cut financial corners while acquiring a B.S. degree in Political Science at Florida State University. Bents has experience with student loans, affordable housing, budgeting to include an auto loan and other personal finance matters that greet all Millennials when they graduate. He has a prodigious appetite for reading, which he helps feed with writing from Scottish philosopher Adam Smith, the “Father of Capitalism.” Bents writing also has been published by JPMorgan Chase, TheSimpleDollar and


  1. DiGangi, C. (2016, February 12) How Many Americans Have Bad Credit? Retrieved from:
  2. Berger, R. (2017, January 6) Which Credit Score Do Lenders Actually Use? Retrieved from: