Does a Debt Consolidation Loan Close Your Credit Cards?

A debt consolidation loan can be an attractive option for consumers struggling with high credit card balances and interest rates. By rolling multiple debts into one new loan, borrowers can simplify payments and often secure a lower interest rate. However, some lenders require borrowers to close existing credit card accounts when they originate the new consolidation loan. So does getting a consolidation loan mean you have to close all your cards?

The short answer is – it depends. Some lenders impose card closures as a condition of approval for a debt consolidation loan. But in many cases, borrowers can keep their credit card accounts open.

How Do Consolidation Loans Work?

Let’s start with a quick refresher on how debt consolidation loans function. These loans allow you to pay off or consolidate multiple unsecured debts like credit cards, medical bills, payday loans, etc. The lender provides one large loan, and you use the funds to pay off the individual accounts.

This simplifies the repayment process to one monthly loan payment instead of many different payments to various creditors. Borrowers also often benefit from a lower interest rate, allowing them to pay off the debt faster.

Online lenders, banks, credit unions, and other financial institutions offer debt consolidation loans. They come in two main forms – secured and unsecured

• Secured loans require an asset like your home or car as collateral Common options include home equity loans and home equity lines of credit (HELOCs)

• Unsecured loans don’t require collateral. This includes personal loans from banks, credit unions, and online lenders.

Why Might a Lender Require Account Closures?

When you apply for a debt consolidation loan, the lender analyzes your debt-to-income ratio. This ratio compares your monthly debt payments to your monthly gross income.

Many lenders want to see your DTI at 36% or lower when they evaluate loan applications. Some may approve applications with DTIs up to 41%. But higher ratios than that often lead to a rejection.

So when a lender reviews your application, they look at:

• Your total monthly debt payments (from credit cards, auto loans, student loans, etc.)
• The new monthly payment for the consolidation loan
• Your total monthly gross income

If your credit card balances are high, your DTI ratio may exceed thresholds for approval. This is where lenders sometimes require account closures.

By closing the credit card accounts, the lender eliminates those minimum payments from your DTI calculation. This suddenly makes your ratio look much better, allowing them to approve the loan.

Essentially, the lender reduces your DTI this way because they want assurance you won’t continue accumulating credit card balances. Closing the accounts prevents you from making charges on those cards.

When Might Credit Card Closures be Required?

Credit card closures are more likely to occur with the following types of lenders and scenarios:

• Smaller lenders – Smaller local banks and credit unions may be more apt to require closures than large national lenders.

• Repeat consolidations – If you’ve consolidated debt with loans before, a lender may mandate closures to avoid a recurrence of ballooning card balances.

• High DTIs – A DTI over 50% makes closures more probable. The higher your ratio, the greater the risk for the lender.

• Poor credit history – Borrowers with credit challenges like late payments, collections, and bankruptcies are more likely to face card closure contingencies.

• Large balances – Outstanding card balances exceeding 50% of your available credit make your DTI spike. Lenders may require closure of heavily utilized accounts.

Essentially card closures provide the lender with greater assurance of repayment when approving borrowers that appear high-risk. By removing your ability to accumulate more card debt, the lender reduces their risk.

How Do Credit Card Closures Impact Your Credit?

Closing credit card accounts affects your credit in a few key ways:

• Credit history – Closing your oldest card shortens your credit history length. Long histories help your scores.

• Credit mix – Eliminating cards reduces the mix of credit types in your profile. Diverse credit is favorable for scoring.

• Utilization rate – Closing an account lowers your total credit limit. That makes balances on remaining cards a higher percentage of available credit.

• New inquiries – If closed accounts lead you to apply for new cards, the inquiries also ding your scores temporarily.

The net effect is usually a small decline in your credit scores. However, the impact is minor compared to ongoing high utilization if balances remain open. The benefit of getting out of debt faster typically outweighs temporary scoring drops from closures.

How to Keep Credit Cards Open with a Consolidation Loan

The good news is consolidation doesn’t automatically require closing your credit card accounts. Many lenders have no issue leaving existing cards open when they approve your loan. Here are some tips to avoid closures:

• Shop with online lenders like LendingClub, Prosper, and Lightstream where account closures are less common.

• Consider a home equity loan or line of credit since your home collateralizes the debt already.

• Ask lenders directly about card closure policies before submitting a full application.

• Make sure your DTI is low before applying. Pay down balances on cards you want to keep open.

• Set up automatic payments on credit cards to avoid future late payments.

• If required to close accounts, ask the lender if you can keep one card open for emergencies.

The key is having a conversation upfront about potential requirements and evaluating alternatives. This increases your chances of keeping accounts open if that is your priority.

Can I Get New Credit Cards After a Debt Consolidation Loan?

Many borrowers wonder if they can open new credit cards after completing a consolidation loan. The answer is yes; lenders impose card closures and restrictions during the repayment period.

Once your debt consolidation loan is paid off, you’re welcome to apply for and open new credit card accounts. Your choice of lenders may be more limited if the consolidation loan lowered your scores. But you can eventually restore good credit and qualify for new cards again over time.

The wisest approach is to avoid card reliance altogether, though. Use debit, cash, or budget-friendly reward cards instead of accumulating new credit card debt. Managing spending and avoiding balances makes it less likely you’ll need debt relief again down the road.

Weigh the Pros and Cons of Closing Credit Cards

Debt consolidation can be a double-edged sword when it comes to your credit cards. On the positive side:

• Your DTI improves so you can qualify for the loan.

• You’re unable to rack up more balances during repayment.

• Your monthly payments and interest cost decrease substantially.

• You’re motivated to change spending habits and avoid card reliance.

At the same time, the disadvantages are:

• Closed accounts ding your credit scores temporarily.

• You have fewer options in case of a financial emergency.

• Rewards potential is reduced by losing the cards.

• New card approvals may require better credit until scores rebound.

Overall, the benefits tend to outweigh the drawbacks, especially when card debt weighs you down. Just go into the consolidation process with your eyes open so you know what to expect and can evaluate alternatives.

Consolidate Your Debt While Keeping Credit Cards Open

Debt consolidation can help you regain control of unmanageable credit card balances. But card closures may be necessary to get approved for some loans.

The good news is you can take proactive steps to avoid credit card closures when consolidating your debt. This preserves your access to credit and protects your credit scores throughout the repayment period.

With some wise planning and researching of lenders upfront, you can reduce your interest costs dramatically while maintaining your existing accounts. That puts you in the best possible position to become free of credit card debt quicker.

Frequency of Entities:

does a debt consolidation loan close your credit cards – 11
consolidation loan – 9
credit cards – 16
debt consolidation loan – 12
lender – 16
debt – 12
credit card accounts – 5
loan – 20
credit – 14
lenders – 7
card – 13
accounts – 7
balances – 6
borrowers – 5
cards – 10
credit card debt – 4
DTI – 7
debt consolidation – 4
monthly payments – 3
interest rate – 3
credit history – 2
HELOC – 2
credit score – 2
home equity loan – 2