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

Will using this service close all my credit cards or can I still keep them open?

Laura L. in Independence, KY

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Why Accounts Get Closed on a Debt Consolidation Program

Consolidated Credit’s Financial Education Director April Lewis-Parks explains why credit card accounts will be closed when you enroll in a debt consolidation program through a nonprofit credit counseling service like Consolidated Credit.

Why does debt consolidation program close credit cards?

When you enroll in a debt consolidation program – also known as a debt management program – creditors freeze your accounts. But in exchange, they agree to significantly reduce or even eliminate interest charges applied to your debt. Most clients see their rates drop to between 0 and 10 percent.

So, that’s the tradeoff that creditors expect. You can’t make any new charges on your existing accounts or get new credit cards until you complete the program. But you can get out of debt faster with total payments that are up to 50 percent less.

It’s also important to note that your credit counselors will help you set up a new budget when you enroll. The goal is to align your expenses with your income, so you don’t need to rely on credit cards. Studies show that many people get into challenges with debt because they use credit to cover daily expenses. People also rely heavily on credit to cover unexpected emergencies. If a budget builds in emergency savings and covers everything you need, it’s easier to break the credit habit.

Leaving a card out of the program

The good news if you’re concerned about closing all your cards is that you may not need to lose all of them. In many cases, you can keep one card out of the program for emergencies or travel. You also generally do not need to include business credit cards.

For anyone that’s married, your spouse only needs to enroll with you in the program if you hold all your credit cards jointly. So, if you have separate credit, they can keep their credit cards while you pay yours off through the program.

This type of flexibility makes it easier to pay off your debt without disrupting your life or your business.

Does a debt consolidation loan require you to close your credit cards?

You may also run into account closures with some lenders if you apply for a debt consolidation loan. When you apply for a loan, the lender considers your debt-to-income (DTI) ratio. The ratio measures total monthly debt payments versus total monthly income. Your ratio must be 41% or less to qualify for a loan with most lenders. With a debt consolidation loan, they factor in the new loan payments and factor out your credit cards.

In many cases, the lender will simply approve or reject your application based on your DTI. However, if your DTI is high, some lenders may accept your loan application but only with caveats. They may require that you close all your accounts in order to secure the loan. That way, they have some assurance that you won’t just run up new balances.

This is more common with smaller lenders, such as local banks or credit unions. Credit unions, in particular, work to help members. So, if a member is having trouble with debt, they might recommend closing the cards. It’s also more likely to happen if you’ve consolidated your debt with a consolidation loan more than once.

The tricky part is that lenders aren’t always upfront about lending restrictions until you formally apply for the loan. Lending agents can give you quotes, but underwriters may have additional requirements once you apply. The challenge is that once you begin a formal loan application, you’ve already authorized a credit check. That creates a hard inquiry on your credit report. Starting over with a new lender and new loan application creates another hard inquiry. Too many of these can actually hurt your credit score, making it harder to qualify for things like consolidation loans.

So, make sure when you’re asking for quotes to ask if the lender places any restrictions on borrowers. This may help you avoid this situation.

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.

Getting a balance transfer credit card never comes with restrictions. If you get approved for the card, the creditor will not require you to close your other cards. And even with a debt consolidation loan, you may only face an account closure restriction in some cases.