How to Get Out of Debt on a Low Income (10 Strategies)

Do you feel like you’re spending too much on groceries? Or find it hard to save money after paying off your debts and monthly bills?

Life is getting pricier for everyone, but it is especially tough for low-income Canadians. Data shows they have been hit the hardest by rising living costs.

For those with limited financial resources, covering basic expenses like rent, groceries and utilities while also tackling debt payments can seem impossible. When your paycheque doesn't stretch far enough to make ends meet, it can be tempting to rely on credit and fall into a cycle of debt. But despite the obstacles, having a low income doesn’t mean you can’t achieve financial freedom. 

With the right approach and mindset, anyone can take meaningful steps towards becoming debt-free. Read on to learn about 10 effective strategies to reduce and ultimately eliminate debt with expert tips and advice. 

“Financial freedom is not determined by the size of your income, but your willingness to stay committed and disciplined to get out of debt.”

~Nazreen Siska, Credit Counsellor

10 Practical Tips to Manage and Eliminate Debt on a Low Income

1. Create a Detailed Budget

If you are on a low income, it is crucial to stay on track with your personal finances to manage and eliminate debt. Making a detailed budget can help you balance your income with your savings and expenses, which will guide your spending to help you reach your financial goals. Every personal budget needs a purpose, and if you are in debt, your first priority should be paying it down.

When creating a budget, start by making a list of your income and expenses. Determine how much money you have to spend each month and compare it with how much you pay for various bills and items during that same period. Be sure to account for paying back any debts in your expenses. It is important to put your income, expenses and debt down in writing to help you track your spending behaviour. 

There are many online budgeting tools and apps that can help you establish a realistic spending plan for your income, including Credit Canada’s free Budget Planner + Expense Tracker. This tool will let you know when you are over or under budget, and how your spending compares to general spending guidelines so you can easily make adjustments. Remember, the key to a successful budget is sticking to it!

2. Prioritize Your Debts

Work towards paying down your current debts by putting the most money towards your unsecured debts first, such as payday loans, credit cards or personal loans, as these tend to have the highest interest rates. Instead of making irregular payments towards various debts, consider one of these strategies when deciding on a repayment plan:

• Avalanche method: The avalanche method involves making the minimum payments on all your debts and then putting any remaining funds towards the debt with the highest interest rate. When it’s paid off, you tackle the debt with the next highest interest rate, and so on. This method could save you the most money over time if your highest-interest debt is sizeable.
• Snowball method: Paying off the smallest debt first, then working your way up to the larger ones, is known as the snowball method. It can help build motivation as entire debts are eliminated. However, this approach can end up being more expensive overall, as you are prioritizing low balances over high interest rates.

3. Cut Unnecessary Expenses

Look at all areas of your spending and see where you may be able to cut back. Do you have the option to downgrade your phone to a more affordable plan? Can you delete take-out apps from your phone? Can you evaluate your insurance policies? Do you have the option of biking to work? Can you make coffee at home to save money? Can you cut back on the amount you’re spending on birthday gifts? Take a look at your budget and consider what non-essential expenses you can reduce or eliminate. Doing so will free up cash in your spending plan each month to put towards your debt and eliminate the balances faster.

While it may be tough to trim these non-essential costs, keep in mind that it's just temporary and your finances will be better for it in the long run! 

4. Increase Your Income

Depending on your schedule and family commitments, working part-time or finding a side hustle to earn extra income can help you pay off your debt faster and save on interest. This could include doing simple tasks like bagging groceries or walking dogs on weekends, or trying out gigs like driving for Uber, or offering your handyman skills on a website like Jiffy. If you have a talent of your own—like knitting scarves or designing jewelry, for instance—consider selling those items online or at local craft markets for extra cash. 

5. Consider Debt Consolidation

If you are having difficulty repaying multiple loans and credit card balances, consolidating the debts may be a solution. Debt consolidation combines two or more debts into one. Two of the most common debt consolidation solutions are debt consolidation loans and Debt Consolidation Programs. It’s important to understand the pros and cons of each option so you can make informed decisions when it comes to your finances.

• A debt consolidation loan is provided by banks, credit unions, and finance companies by combining your debts into a single loan from a single lender with a unified interest rate. This can be helpful for high-interest debts like credit cards and payday loans but is generally unavailable to people with bad credit, low income, or lots of debt. While shifting debt to a consolidation loan can seem like a temporary relief, it also means that you will be in debt for longer.
• A Debt Consolidation Program (DCP) is an arrangement made between your creditors and a non-profit credit counselling agency to simplify your debt payments and reduce the total interest owed. Working with a reputable, non-profit credit counselling agency means a certified credit counsellor will also negotiate to simplify all your unsecured debts (like credit cards, personal lines of credit, and personal loans or payday loans) into a single, lower monthly payment. This form of debt consolidation can lead to faster debt relief.

However, keep in mind that under a DCP you will not be able to obtain new credit while you are on the program, including new credit cards/lines of credit or increasing your credit limits. Additionally, while you’re undergoing a DCP, your credit score could decrease initially, then improve once the program is completed. While these limitations may be inconvenient, they are temporary and serve to avoid more serious, long-term damage to your credit. 

6. Seek Professional Advice

If you need assistance with budgeting or consolidating your debt, call Credit Canada for personalized advice on how to manage your debt. A certified credit counsellor can provide guidance tailored to your specific situation – and our counselling services are completely free! We can even conduct a free debt assessment to provide insight on how to best reduce debt and work towards financial freedom. 

7. Utilize Financial Assistance Programs

The Government of Canada offers several benefits and debt relief programs to help make life more affordable for those on a low income. Eligibility for government benefits can vary based on your income and living situation, but if you qualify, consider utilizing these programs so you can save money and pay off your debt sooner: 

• Canada Child Benefit
• Canadian Dental Care Plan
• Canada Workers Benefit
• GST/HST credit
• Disability tax credit
• Age amount credit 
• Repayment Assistance Plan for student loans

In addition to those listed above, your provincial government may also offer separate benefits and credits that can help put money back in your pocket.

8. Avoid Taking on New Debt

When trying to get rid of debt on a low income, it is important to avoid taking on any new debt. Don’t open new credit cards or apply for loans unless you have strategic reasons, and freeze all unnecessary spending. You might feel tempted to seek out a loan to manage your bills and stay afloat for a little longer. However, taking on more debt–especially high-interest options like payday loans–can worsen your situation. Adding to your debt load makes it tougher to clear your debts altogether.

9. Negotiate with Creditors

A strategy to chip away at your debt, even with a low income, is to negotiate with your creditors for lower interest rates. Some (or all) of your debt likely carries hefty interest charges, diverting a significant portion of your payments away from the principal balance. 

In such instances, consider reaching out to your creditors to explore the possibility of negotiating a lower rate. Many creditors are open to assisting if you're struggling to keep up with payments. And if you've been making your payments on time, they might be even more willing to work with you, especially if your limited income is impeding your ability to meet your financial obligations.

10. Stay Motivated and Patient

If you’re on a low income and feel like you’re drowning in debt, you’re not alone. At Credit Canada we speak to Canadians every day who are worried about their finances. We understand that dealing with debt isn’t easy–it takes time and can be an emotional process. 

When things get tough, it’s important to remember your why. What’s your inspiration for wanting to get out of debt? Maybe you want a better life for your family, or maybe you want to be debt-free before you retire. Whatever your reason, keeping it top of mind will help you stay motivated throughout the process and drive you to succeed.

Conclusion 

Remember that no matter how daunting it may seem, breaking free from debt on a low income is possible. 

By sticking to a strict budget, prioritizing your debt repayment strategy, and trimming expenses wherever possible, you'll make significant steps in the right direction. Consider picking up some extra work or checking if you're eligible for government help to boost your income, and don't hesitate to seek professional guidance on your financial situation. Most importantly, keep your spirits up and stay patient. 

Becoming debt-free takes time, but you can get there–and we can help! For more advice on debt management, contact Credit Canada and book a free credit counselling session with one of our certified non-profit counsellors. Call 1-800-267-2272 to get started today or talk to us on live chat for a free consultation.