Millions of Americans struggle with credit cards. The average household now owes between $5,000 and $9,000 in credit card debt and the number continues to rise. If you’re one of them, debt consolidation could be a way out.
Most forms of debt consolidation will not close your credit cards, meaning you can still use them once you’ve rolled your debt into a new loan.
Whether you should still use them is a different story.
Disclaimer: Credit Summit may be affiliated with some of the companies mentioned in this article. Credit Summit may make money from advertisements, or when you contact a company through our platform.
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Debt Consolidation Doesn’t Usually Close Credit Cards
In general, if you use a traditional debt consolidation method like a loan or a balance transfer credit card, your accounts will not be closed and you can still use them.
Pro tip: Using your credit cards after consolidating debts can set back your efforts to become debt-free. If you can’t pay your new credit card bills by the due dates, your financial situation won’t improve. The only way for debt consolidation to succeed is to be able to ensure that you can make your loan payments each month along with all of your other monthly bills and expenses.
Debt Relief Options That Don’t Close Credit Cards
A balance transfer credit card and most debt consolidation loans won’t close your credit cards. However, these options will only be effective if you don’t run up new debt on your newly paid-off credit card accounts.
There are a few similarities and some key differences between the two.
Both require a good credit score and a hard credit check. The hard inquiry will push down your credit score. And you still need to be able to make your monthly debt payments.
Here’s a breakdown of how each method works.
Balance Transfer Credit Cards
A balance transfer credit card is a form of credit card refinancing that lets you transfer debt from one high-interest card to another, ideally with a lower interest rate. Many balance transfer cards come with a 0% or low APR during the introductory period, which is usually between 6 and 18 months. This can save you a lot of money in interest if you can pay off the full balance within that time frame.
Some of these credit cards come with a balance transfer fee of 3% to 5%. They also have their own credit limit. If your current debts are higher than that limit, you won’t be able to consolidate everything.
This method won’t close your other credit card accounts. However, you’ll need good credit to qualify for a new credit card with good rates and terms.
READ MORE: Best Balance Transfer Credit Cards
Debt Consolidation Loans
If you have good credit, a debt consolidation loan is another way to consolidate debt without closing credit cards. As long as the loan has good terms and a low interest rate, it will save you money each month because you’ll be paying less each month. This, in turn, will give you more money to cover daily or monthly expenses and pay down other high-interest debts.
Plus, since you’re combining multiple loans or credit cards into one loan, you’ll only have one monthly bill to manage. This can help reduce late payments and fees. And, since most debt consolidation loans come with longer loan terms. Some lenders charge an origination fee for a debt consolidation loan, which should be considered when choosing a lender.
There are several different types of loans you can use for consolidation. You aren’t limited solely to loans branded “debt consolidation loans.” You can also use personal loans, home equity loans, home equity lines of credit (HELOCs) and 401(k) loans to consolidate your debts while keeping your credit card accounts open.
In rare cases, a lender could require you to close your credit card accounts. This usually only happens if they deem you at risk for running up your newly zeroed-out credit cards, such as if you have a high DTI ratio or low credit score. It’s also more common at smaller credit unions and community banks than it is with larger lenders.
Pro tip: Neither of these options will be particularly effective if you continue to rack up missed payments and late fees. It’s important to make sure that any new loan you take out is affordable.
READ MORE: How Does Debt Consolidation Work?
Debt Relief Options That Close Your Credit Cards
A debt management plan or debt settlement can also be used to consolidate debt, but they may require closing your credit cards.
Debt Management Plans
A Debt Management Plan (DMP) is typically offered through a credit counseling agency. When you commit to one, you’ll enroll any credit cards and other unsecured debts into the program, which is set up by your credit counselor. From there, the agency will negotiate with your creditors to reduce your monthly payments or interest rates on those accounts. If they’re successful, you’ll then make monthly payments to the agency, which they’ll disburse to your creditors.
Typically, DMPs last between 3 and 5 years. By the end of this period, all enrolled debts should be gone. However, your enrolled accounts will almost certainly be closed. This includes credit cards. In some cases, you might be able to keep one account open for emergencies.
Pro tip: Debt Management Plans can usually only consolidate credit card debt, so if you have other forms of unsecured debt, like medical bills or personal loans, this won’t be a good option for you.
Most agencies charge a small service fee, ranging from $25 to $75 per month. This can add up to a significant amount over three to five years, so be sure to factor that money into your cost breakdown.
If possible, go with a nonprofit credit counselor, which you can find on the Department of Justice website.
Debt settlement involves negotiating your total debt down to a lower amount, which is then repaid over a set timeframe or in one lump-sum payment. This can be done at either a debt settlement agency or on your own.
If you choose to work with an agency, you’ll be asked to stop making your monthly payments to creditors. Instead, you’ll start paying a certain monthly amount into a secured savings account.
The benefit of stopping payments is two-fold. First, creditors have no incentive to settle if they’re still getting money from you and second, it will help establish that you’re currently suffering financial hardship.
While money accrues in your savings account, the debt settlement company will work with your creditors or lenders to lower your debts. Upon reaching a settlement, the agency will use the money from this account to pay off your creditors.
Debt settlement can be a bit risky because creditors aren’t required to settle. However, if your program is successful, you could save an average of 30% of your total enrolled debt after paying the company’s fees. And debt settlement companies aren’t allowed to charge upfront fees, so you won’t have to pay if your creditors don’t settle.
If you’re considering debt settlement, check out our top recommendations. If you have payday loan debt, click here.
READ MORE: Best Debt Settlement Companies
Bankruptcy can help you discharge most unsecured debts, but it’s a big risk and can destroy your credit score for 7 to 10 years.
When you file for bankruptcy, an automatic stay immediately goes into effect. This prevents your credit card companies from taking actions including accepting payments or sending bills. Though the automatic stay is beneficial because it stops debt collection efforts, it also results in the closure of your credit card accounts – even the ones that are current or paid off – because credit card issuers don’t want to risk violating the automatic stay.
The two primary types of personal bankruptcy — Chapter 7 or 13 — are very different. Chapter 7 has strict income qualifications and Chapter 13 is a lengthy process. The filing could also cost you certain assets. Because of this, bankruptcy should be considered a last resort.
Pro tip: If you’re considering this route, speak with a bankruptcy attorney first to see what they advise.
READ MORE: Types of Bankruptcy
What happens when you file for bankruptcy? Watch this to learn more about the process.
Why is Closing Credit Cards Bad?
First off, if you have bad credit, it could be difficult to be approved for new accounts once your debts are consolidated and paid off.
If you can control how you use them, credit cards have a lot of benefits, including purchase protections, cell phone insurance, cash back bonuses or points offers. You don’t want to miss out on those protections.
In addition, the average age of credit – or how long you’ve had your credit card accounts – is worth 15% of your FICO score. Even if the accounts have a zero balance, they still contribute to the average age of your credit history as long as the accounts are open. But if the accounts are closed, suddenly your average age of credit becomes much shorter, which will cause your credit score to drop.
Plus, when several accounts are closed at once, you’ll have less available credit and your credit utilization ratio will increase. This is another key part of your credit score, worth 30% of your score.
However, it’s important to realize that payment history is also a key component of your credit score, worth 35% of your overall score. When you consolidate your debts into one loan, your credit score will start to rise as long as you keep making on-time payments.
The Bottom Line
There’s no one-size-fits-all approach to personal finance.
Debt consolidation generally won’t close your credit cards. Most debt consolidation loans and balance transfer credit cards don’t require closing your other accounts, but they also have more stringent eligibility requirements. (You don’t necessarily have to have excellent credit, but you’ll need to have good credit at a minimum.) Other debt relief methods, such as debt settlement, are a less expensive way to get out of debt, but your accounts will be closed. Weigh your options and choose the best option for your financial situation and needs.
Secured debt refers to a loan that is backed by collateral, which is an asset that the borrower puts up as security. If the borrower defaults on the loan, a lender can seize the collateral to recover the amount owed. Examples of secured debt include mortgages and car loans.
Unsecured debt is not backed by collateral. Instead, it is based solely on the borrower’s creditworthiness and ability to repay the loan. Examples of unsecured debt include credit card debt, personal loans, and student loans.
A hard inquiry occurs when a lender or creditor requests your credit report in order to make a lending decision, such as when you apply for a credit card, loan, or mortgage. Hard inquiries can potentially lower your credit score by a few points and remain on your credit report for up to two years.
Soft inquiries do not affect your credit score or credit report. They occur when you check your own credit report, when a lender pre-approves you for a credit offer, or when a potential employer or landlord requests your credit report as part of a background check. Soft inquiries are not visible to lenders and do not impact your ability to obtain credit in the future.
Debt consolidation programs can hurt or help your credit, depending on a few factors. By opening another new account from the debt consolidation, the average age of all your accounts will be lowered, which can negatively impact your credit history.
The credit inquiry from the hard pull can also lower your score, and higher credit utilization also reduces your score.
But it could also raise your score if the loan lowers your credit utilization and you make all your one-time payments on time, making this positive for your payment history.
Credit cards can help you pay for unforeseen bills or emergencies when used responsibly. With enough planning, you can also use them for big-ticket items, though this could result in high interest fees. Credit cards can also help improve your credit score, provided you stay on top of them. With a good credit score, you can qualify for better interest rates and loan terms when applying for financing for things like a mortgage or car.