Does Debt Consolidation Close Credit Cards? What You Need to Know

Millions of Americans struggle with high-interest debts like credit cards. If you’re one of them, debt consolidation could be the solution. Some forms of debt consolidation will close your credit cards, while others will not. So, before going this route, here’s everything you need to know to make sure you choose the best option for you.

What is Debt Consolidation?

Debt consolidation is the process of using one larger loan to combine and pay off two or more smaller loans. This new loan comes with its terms and interest rate, which are ideally more favorable than your original debts.

Consolidating multiple debts into one can make it easier to budget your money. For one thing, the longer loan term and lower interest rate usually mean reduced monthly payments. For another, having only one payment due each month decreases the risk of late payments.

There are several ways to consolidate debt, such as a:

  • Debt consolidation loan
  • Balance transfer credit card
  • Debt management plan
  • Debt settlement

Most people use debt consolidation to pay off high-interest credit cards or short-term loans. To qualify, you’ll need good credit history with a 650+ FICO credit score and proof of income. Some lenders only work with borrowers with a debt-to-income (DTI) ratio that’s no more than 36% to 43%. The higher the credit score and the lower the DTI ratio, the better the terms and interest rates you could receive.

Does Debt Consolidation Close Credit Cards?

This depends on the debt consolidation method.

Some options, such as a debt management plan or program (DMP) or a debt consolidation loan, can close credit cards. Others, like a balance transfer credit card, home equity loan, or 401(k) loan, won’t close credit cards.

Why is Closing Credit Cards Bad?

A person’s FICO credit score ranges from 300 (bad credit) to 850 (excellent credit):

  • Poor credit: 300–600
  • Fair credit: 601–660
  • Good credit: 661–780
  • Excellent credit: 781–850

This score is based on the following factors:

  • Age of credit: This refers to how long you’ve had credit or open accounts. Even if the accounts have a zero balance, they still contribute to the overall age of credit as long as they’re active. This makes up around 15% of your credit score.
  • Credit utilization: This is the amount of credit you’re currently using divided by the amount of available credit you have across all open accounts. It does not include mortgage or auto loans. It makes up 30% of your score.
  • Payment history: Late and on-time payments make up 35% of a credit score.
  • New credit: This includes any new or more recent accounts and hard inquiries (when a lender checks your credit report during the application process). This makes up 10% of the credit score.
  • Credit mix: This refers to the different types of open accounts you have. Having only one type of credit, such as student loans or credit cards, won’t help you build credit. But having several types can. This accounts for 10% of the score.

By keeping older credit card accounts open and in good standing, you can add to your overall age of credit history. Plus, having them open but at a zero balance adds to your total available credit, which can reduce credit utilization.

How Do I Consolidate Debt?

There are several effective ways to consolidate debt, such as with a debt consolidation loan or home equity loan. Before choosing any of these options, make sure you understand your finances and spending habits to avoid making a poor financial decision.

Take Control of Your Financial Situation

First, look over your finances — that is, your total net income (take-home pay) and monthly expenditures. People often use credit cards to pay for things they can’t afford or haven’t budgeted for, so it’s important to understand where your money goes.

Include every expense — fixed and variable — and all sources of income. If you’re not sure where to start, take a look at the past 3-6 months’ bank statements and go from there. If the amounts vary, average them out for an estimate of your earning and spending totals. Be sure to account for every minimum monthly payment.

Also, get a free annual copy of your credit reports from all three major bureaus. This will give you a better idea of where you’re at and what types of debt consolidation you could qualify for.

Make a Plan

Next, make a plan based on your income and current debts. If the majority of your debt is due to credit cards, find ways to cut back on using them. One way to do this is with a personal budget that’s realistic for your lifestyle but can reduce overspending and help pay down debt.

Don’t worry about resolving your debts overnight. With a well-organized financial plan and budget, you can make small steps toward your goals.

Track Your Income and Spending

Once you’ve got a plan, it’s time to take action. Use a spreadsheet like Excel or Google Sheets to create a budget. Record all monthly payments and expenditures and compare the total amount to your total income. Add everything up, including any student loans, car loans, credit card debt, groceries, utility payments, and so forth. Track your total interest charges, too.

If you don’t want to do this manually, sign up for a budget app like Mint. Budget apps can help you track your expenses and income. They can also help you stay within your means while identifying ways to save or cut back on excess spending.

Find a Side Hustle

If you’re struggling with making on-time payments or paying down debt, consider getting a second job or side gig. This can be a great way to make extra money to help you tackle your debts. There are plenty of options out there, from freelance tutoring to graphic design, so find what works.

Another option is to get a roommate to help share monthly expenses, like rent, groceries, or utilities. This will free up some extra cash so you can save more or pay down debt.

Downsize

When done correctly, downsizing can help lower how much money you spend each month. For example, if you live somewhere with high rent, consider moving to a cheaper apartment or neighborhood. This is especially useful if your job isn’t location-dependent.

Another way to downsize is to get a more affordable or cost-effective vehicle. Doing so can mean a lower auto loan and less money spent on auto insurance or gasoline.

Take a look at any other areas you might be overspending. If, for instance, you have multiple monthly subscriptions you don’t use, cancel them. This won’t save you a ton of money, but it can add up over time.

Negotiate with Your Credit Card Companies

If you’re struggling with high-interest credit cards and high balances, try negotiating with your credit card issuers. At the end of the day, they just want to get paid. So, depending on the circumstances, they might work with you on a more affordable repayment plan or settle your debts to a lower amount. Before contacting them, make sure you know how much you owe, what your interest rate is, and what your options are.

One option is a lump-sum settlement. This involves paying a large amount upfront that’s lower than the original balance. For example, if you owe $5,000 but can only pay $3,500, the card issuer might be willing to accept the lower amount and let the rest go.

Another method is a workout agreement or hardship program. This is where the card issuer (or lender) will work with you to create a payment plan and drop or waive interest rates for a period of time.

If the card issuer agrees to negotiate with you, be sure to get everything documented in writing.

There are Two Main Credit Card Debt Consolidation Options That Don’t Close Credit Cards

A balance transfer credit card and most debt consolidation loans won’t close your credit cards. These options will only work if you don’t end up using the original credit cards to accrue new debt. Both methods require a credit check. They also come with varying terms and interest rates, so use an online debt consolidation calculator to make sure they’re realistic for your financial situation.

Use a Balance Transfer Credit Card

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, which is generally 3% to 5%. They also have their own credit limit. So, 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.

Apply for a Debt Consolidation Loan

If you have good credit, a debt consolidation loan is another way to consolidate debt without closing credit cards. As long as it has good terms and a low interest rate, it could save you money each month in payments. 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 pay. This can help reduce late payments and fees. And, since most debt consolidation loans come with longer loan terms, your monthly payment will be lower. Some debt consolidation loans do come with an origination fee, so keep this in mind.

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.

Debt Consolidation Programs that Could 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.

Try a Debt Management Plan Through a Credit Counseling Agency

A debt management plan (DMP) is typically offered through a credit counseling agency. With one, you’ll enroll any credit cards and other unsecured debts into one program. 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, this method usually requires closing any enrolled accounts, including credit cards. In some cases, you might be able to keep one account open for emergencies.

Most agencies charge a small service fee. If possible, go with a nonprofit credit counselor, which you can find on the Department of Justice website.

Explore Debt Settlement

Debt settlement is the process of trying to negotiate your total debt reduced to a lower amount. This can be done at either a debt settlement agency or on your own.

If you choose to work with an agency, you’ll need to start paying a certain monthly amount into a secured savings account. Meanwhile, they’ll 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.

During the process, the agency will typically tell you to stop making any payments to your creditors. This can hurt your credit score as the creditor will report any missed payments to the credit bureaus. It could also result in late fees.

Debt settlement is somewhat risky as it doesn’t always work and can hurt your credit score. It can also take multiple months or even longer. But, if all goes well, you could reduce your total debts by 50% after accounting for any agency fees.

If you’re considering debt settlement, check out our top recommendations.

Other Types of Debt Relief

If you’re looking for other ways to reduce or consolidate debt without closing credit cards, here are some options.

Payday Alternative Loans 

Some credit unions offer payday alternative loans (PALs) to current members. These are regulated, short-term loans with a maximum APR of 28%. There are two types of PALs:

  • PAL 1: Loan amounts range from $200 to $1,000 and have a repayment term of 1 to 6 months. Borrowers must be a member of the credit union for at least 1 month to qualify. These loans sometimes come with an application fee of up to $20.
  • PAL 2: These loans can be up to $2,000 and have a repayment period of up to 12 months. Borrowers don’t need to wait after becoming a credit union member to apply.

Although these are small loans, the interest rate is much lower than other short-term options like payday loans or certain high-interest credit cards. You do need good credit to qualify.

Refinance Your Student Loans

Student loan debt is skyrocketing. If you have private student loans, you might be able to refinance them for a better interest rate and lower monthly payments. Doing this will reset your payment plan, though, meaning you could end up paying more over time. This is a good option if your credit score has improved since taking out the loans and you can qualify for more favorable terms. It’s also helpful if your monthly payments are too high.

Refinancing your student loans could open up some extra cash each month, which you can then use to help pay down other debts.

Personal Loans

Personal loans can be used for nearly anything, including debt consolidation. Most lenders require borrowers to have good credit, a minimum income, and a low DTI ratio. If you qualify, you can use the funds to pay off other, higher-interest debts.

Most personal loans are unsecured, meaning they rely on things like credit scores. Some are secured, though, which means they require collateral like a paid-off vehicle or home to get.

Refinance Your Mortgage

Refinancing a mortgage essentially means replacing your old one with a new one with its terms and interest rate. Doing this typically resets the loan, but it can also result in lower monthly payments. You can use the extra money you were paying in interest to start paying off other debts.

Another method is cash-out refinancing. With this, you get a new loan for a higher amount than what you currently owe, but less than the current market value of your home. You’ll receive the difference at closing, which you can then use for things like paying off credit cards.

Home Equity Loan or Home Equity Line of Credit (HELOC)

A home equity loan lets you borrow against the current equity in your home – usually between 50% and 80%. This is determined based on the home’s current market value and the balance due on the mortgage. These loans have a fixed interest rate that’s based on your credit score. The equity acts as collateral, meaning you risk losing the home if you default on payments.

HELOCs work similarly in that they use the home equity as collateral, but they have variable interest instead of fixed. With one, you have a draw period of 5-10 years, during which time you can make purchases as if using a credit card. During this period, you can consolidate debts or pay for other essentials such as home repairs. Once the draw period ends, you enter into a repayment period where you must start repaying the amount borrowed.

If All Other Debt Consolidation Options Fail

Bankruptcy

Bankruptcy can help you discharge most unsecured debts, but it’s highly risky and can ruin your credit score for 7 to 10 years. Depending on which type of bankruptcy you file — Chapter 7 or 13 — it could also cost you certain assets. Because of this, bankruptcy should be considered a last resort. If you’re considering this route, speak with a bankruptcy attorney first to see what they advise.

A Chapter 7 bankruptcy can wipe out any outstanding unsecured debts like credit cards or high-interest payday loans. It will, however, require using any assets you currently own – such as a home – to cover the difference in what you owe. It also won’t get rid of debts like federal student loans, child support payments, or federal taxes owed.

A Chapter 13 bankruptcy works a little differently. With one, you enter into a 3-5 year repayment plan that the court approves. During this time, you’ll need to make regular payments on any debts. Once the repayment period ends, any remaining eligible debts will be removed.

What happens when you file for bankruptcy? Watch this to learn more about the process.

Be Sure to Review Your Credit Report and Credit Score

Stay on top of your credit score by getting a copy of your credit reports once every 6 to 12 months. You can get a free yearly copy at Annualcreditreport.com. Or you can request it from each credit bureau — TransUnion, Experian, and Equifax — directly.

People with bad credit typically pay the highest interest rates and receive less ideal loan terms. They also face a higher rejection rate when applying for different forms of financing. By regularly checking your credit reports, you can find the areas where you can improve. You can also identify and dispute any errors that are dragging your score down.

There are some services out there that will help improve your credit score, such as Experian Boost. With this free service, you can report nontraditional payments, such as rent or monthly subscription payments, to Experian to help build credit.

The Bottom Line

Debt consolidation can close your credit cards, depending on the method you use. Most debt consolidation loans and balance transfer credit cards won’t close these other accounts, but they also have higher requirements. Other methods, such as debt settlement, might require you to close any associated accounts to ensure the process works as intended. Weigh your options and choose the one that works best for your financial situation and needs.

FAQs

Why is Closing Credit Cards Bad?

Closing your credit cards will increase your credit utilization ratio by reducing the amount of available credit you have. It will also impact the average age of all open accounts. These two factors contribute to your credit score, so closing the accounts can cause your score to drop.

Do You Lose Credit Cards After Debt Consolidation?

Not always. Most debt consolidation loans and balance transfer cards don’t require closing or losing your credit cards. However, debt management plans and debt settlement usually do result in closed accounts.

How Much Credit Card Debt Does the Average American Household Have?

The average American household owes around $8,701 in credit card debt.

What are the Benefits of Credit Cards and Credit?

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.