Do You Have to Cancel Credit Cards With Consolidation?

When you take on a debt consolidation loan, you must be sure that you are fully committed to staying out of debt. This means that you must lock up your credit cards and stop spending on them; however, that doesn't mean you have to cancel your accounts. On the contrary, if you cancel your credit cards, you may be doing more harm than good.

Debt Consolidation

A debt consolidation loan pays off your current balances so that you just have to make one monthly payment. The loan itself is completely separate from your credit cards; therefore it's not necessary to close any of your accounts. In fact, doing so may actually hurt your credit score.

Drawbacks

When you close a credit card account, you're affecting your utilization ratio and your credit history in a negative way. Your utilization ratio is the amount of debt you have to the amount of credit available to you. This is one of the biggest factors in calculating your credit score. If you close an account, the amount of credit available to you shrinks. Your credit history is also important in figuring out your credit score, and lenders use it to assess your creditworthiness. Closing an account means that you end your credit relationship with the company, which reflects negatively on your credit report.

How to Cancel

You should only cancel a credit card after you've paid off the balance -- otherwise, you can never ask for a lower interest rate. Once you've paid off the card, call the creditor and let a representative know you want to cancel it. Send a follow-up letter with the representative's, stating that you want to close your account. Check your credit report to confirm that the account has been closed but not "closed by creditor," which makes it look as though you were delinquent on payments.

Considerations

Of the consumers that take out debt consolidation loans, 70 percent accumulate the same amount or more debt two years after consolidation, according to Chris Viale, general manager of Cambridge Credit Corporation, in a 2003 Bankrate article. Debt consolidation frees up your credit, making it tempting to use your credit cards again, which may cause you to spiral further into debt. It is therefore important to stop spending on your credit cards when you take out a debt consolidation loan; however, canceling the cards will only hurt your score. If you do decide to cancel, listen carefully to any offers the credit card company representative may make. You may be able to get lower interest rates or other incentives.