Does Debt Consolidation Close Credit Cards When You Enroll? (2024)

FAQs

Does Debt Consolidation Close Credit Cards When You Enroll? ›

The short answer is Yes, people are generally allowed to use their credit cards after debt consolidation as it does not typically involve closing credit card accounts.

Can I use debt consolidation without closing credit cards? Yes, although it depends on your situation. If you have good credit and a limited amount of debt, you probably won't need to close your existing accounts. You can use a balance transfer or even a debt consolidation loan without this restriction.

You can still use credit cards after you consolidate your debt. Consolidating credit cards means you move all of your debt to one account, which resets your credit limits. Once your credit card balance is zero, you can still use it as long as you don't close the account.

Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.

The potential drawbacks of debt consolidation include the temptation to rack up new debt on credit cards that now have a $0 balance and the possibility of hurting your credit score with late payments. Also note that the best personal loans go to consumers with very good or excellent credit, so not everyone can qualify.

Until you repay your debts through the approved debt counseling consolidation plan, you usually will not be able to open or apply for any new lines of credit or loans. Some debt counseling services advise closing out credit cards when they have been fully paid off.

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

Debt consolidation is a good idea if your monthly debt payments (including mortgage or rent) don't exceed 50% of your monthly gross income, and if you have enough cash flow to cover debt payments.

If you have a good credit score or better, want to simplify your finances, prefer fixed payments and can afford the monthly cost, debt consolidation may be a good option for you.

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

How quickly does debt consolidation work? ›

For an unsecured personal debt consolidation loan, it takes about one to seven days to disperse funds.

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO^® Score. Even one missed payment can damage your score.

You'll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn't automatically equal a denial, as some lenders offer loans for bad credit.

Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

The hard part: Banks don't grant consolidation loans to everyone. They may refuse your application, for one or numerous reasons. In short, consolidation might be an option if you have good credit and a stable, well-paid job.

Any credit card that is included in your DMP is required to be closed. Here's how it works — the creditor, which is typically a bank or other financial institution, works with MMI to create a DMP, which usually includes reduced interest rates on your credit card accounts.

Credit experts advise against closing credit cards, even when you're not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.

As we've mentioned, a debt consolidation loan is where you take out one large loan that pays off your existing debts. It's usually arranged by you through a bank. These types of loan are usually used to pay off credit card and other personal loan debts.