Does Debt Relief Cancel Credit Cards?

Looking into the impact of debt relief on credit cards? That’s a good sign. It means you're gathering facts before deciding on your next move.

Let’s explore how debt relief impacts your ability to use credit cards, and how different debt relief methods operate. The goal is to help you determine if debt relief is right for you and, if so, which type would serve you best. 

Does Debt Relief Cancel Credit Cards?

The short answer is "sometimes." There are several effective debt relief methods, and the one you choose determines what you need to do with your credit cards. While having access to credit cards may be important,  it's only one of several factors to consider as you decide which debt relief method best fits your financial situation and lifestyle. 

How Debt Settlement Affects Your Credit Cards

You may be able to continue using your credit cards following debt settlement, but whether you should depends on your specific financial situation. To understand why there’s no black-and-white answer, it helps to know how debt settlement works.

Debt settlement process: If you stop making payments to your creditors while you save enough money for settlement offers, your accounts could be closed. 

Your creditors report each missed payment to the credit reporting agencies (TransUnion, Equifax, and Experian). Once you’ve missed enough payments, a credit card company may close the account on its own. 

Settlement agreements: Debt settlement involves negotiating with your creditors to clear existing debt for less than the full amount you owe. The settlement agreement between you and your creditors may require you to close accounts. 

Your credit standing: Also, debt settlement could affect your credit standing. Your current creditors have the right to periodically review your credit reports and decide whether to extend you credit, and if so, how much. If they see that you’ve settled other debts, they could choose to close your account. 

How Other Debt Relief Options Impact Credit Cards

Debt settlement isn't your only option. Here's how other debt relief programs could impact whether you can continue using credit cards. 

Debt management plan (DMP)

In most cases, you’ll have to agree to stop using credit while your DMP plan is active. You have to get by without credit cards for a while. With a DMP,  a structured debt repayment plan is worked out with your creditors to reduce your interest rates and come up with a monthly payment you can afford. Most debt management plans are designed to be completed in three to five years, helping you pay down debt faster than you could have by only making the minimum monthly payments. 

Debt consolidation loan

With a debt consolidation loan, you borrow enough money to pay off existing debt, then repay the new loan by making monthly payments. While you're not required to stop using credit cards when you take out a debt consolidation loan, you may decide to. It could be easier to repay your new loan if you’re not also generating new debt regularly.  

Bankruptcy

The two most common types of bankruptcy are Chapter 7 (certain assets are sold to pay off your debts) and Chapter 13 (you make regular payments for three to five years). One of the first things you're asked to do is provide the court with a list of creditors, including credit card companies. You don’t have the option to exclude accounts. Everyone you owe money to gets notified that you've filed for bankruptcy. Nearly all credit card issuers cancel your account once they receive a notice. 

What Happens to Your Credit After Debt Relief

Here's a look at typical outcomes:

• Debt settlement: Your credit score takes a hit when an account is reported as “settled” instead of “paid as agreed.” Most people settling debts have accounts in collections, and those can also cause significant credit score damage.

• Debt management plan: Your credit score takes a hit if you have to close credit accounts that still have a balance. If there’s a notation on your account that you’re enrolled in a DMP (and there usually is), creditors checking your credit history could assume you've had problems making payments. This could make it more challenging to get new credit.

• Bankruptcy: Chapter 7 and Chapter 13 bankruptcy cause significant credit score damage for seven to 10 years.  

• Consolidation loan: Applying for a new loan could cause your score to temporarily lose a few points. Paying off your credit cards with an installment loan could have a positive impact on your credit if doing so gives you a lower credit utilization ratio.

How to Rebuild Credit After Debt Relief

What goes down can also go up. The best part of getting through debt relief is knowing your finances are in better shape, you can afford your monthly bills, and you can work on rebuilding your credit. Here are some ways to make that happen:

• Pay your bills on time every time.

• Keep an eye on your credit reports to ensure no mistakes are listed and no new accounts are opened in your name without your knowledge.

• Keep your credit card balances as close to zero as possible. If one sneaks up, focus on bringing it down.

• Get started on a new, healthier credit score by opening a secured credit card that reports to the credit bureaus. You’ll need to pay a cash deposit.

• Become an authorized user on a friend’s or family member’s account. 

• Don’t apply for credit until you really need to.

Making The Right Choice For Your Financial Situation

Once you've compared different types of debt relief, choose a plan you fully understand, and one you are confident you can stick with. If you need someone to help you sort out your debt relief options, Freedom Debt Relief can help.