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Do you have to close all your credit cards when settling debt?
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Between today’s high inflation rate, the elevated interest rates meant to temper it and other economic hurdles, there’s no question that many households are facing issues with their finances. After all, elevated inflation can lead to vastly increased costs on everything from the fuel for your car to the roof over your head, and if your finances were already stretched thin before the uptick in the cost of living, chances are you’re feeling the impact of much tighter budgetary constraints now.
In these situations, you may even be relying on short-term borrowing tools, like credit cards, to help cover some of your essentials. But while doing so can be a route to covering the costs of your necessities, it also typically comes at a high price, as credit card interest rates are hovering near 22% on average currently. So, if you’re using your credit cards as a stop-gap measure but are unable to pay the balance off each month, the interest charges can, and often do, compound quickly.
And that, in turn, can lead to overwhelming credit card debt. When looking for solutions to this type of debt, some people will consider credit card debt settlement as a way to settle the balance and pay less than the full amount owed. However, when considering debt settlement, a common question arises: Do you have to close all your credit cards during this process? Below, we’ll detail what you should know.
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Do you have to close all your credit cards when settling debt?
Before tackling the credit card closure question, it’s essential to understand what debt settlement entails. Debt settlement is a process where you try to negotiate with your creditors to get them to accept a lower amount than what you owe. This option is typically considered when you’re unable to meet your current debt obligations and want to avoid bankruptcy.
And, it can make sense to close your credit card accounts when you’re dealing with overwhelming debt, as there are many risks to keeping them open, including the temptation to keep using them. But in most cases, you are not technically required to close all your credit cards when settling debt.
That said, there are situations where closing some or all cards may be necessary, but it depends on several factors, including the type of debt settlement program you’re pursuing, your financial goals and your ability to manage credit responsibly in the future. For example, debt settlement can be pursued independently or through a debt relief company. And, the approach you choose may influence whether you need to close your credit cards.
If you’re settling debts on your own, you generally have more flexibility regarding your credit card accounts, and you can choose which accounts to settle and which to keep open. In this scenario, you’re not obligated to close your credit cards unless you’re specifically required by individual creditors as part of the settlement agreement.
But, when working with a debt relief company, there may be policies in place that require you to close your credit card accounts as part of the debt settlement process. This requirement is typically in place to prevent you from accumulating more debt while in the program and to demonstrate your commitment to becoming debt-free.
Ready to tackle your high-rate credit card debt? Find out what your options are here.
Should you close your credit cards when settling debt?
While credit card closure is not always a mandatory component of debt settlement, there are several reasons why closing credit cards during debt settlement might be beneficial for your finances, including:
- To avoid temptation: Closing your credit cards can help you resist the urge to accumulate more debt and avoid a similar credit card issue in the future.
- To focus on debt repayment: With fewer open lines of credit, you can concentrate on paying off existing debts without the distraction of managing multiple accounts.
- To simplify your finances: Reducing the number of open accounts can make it easier to track your spending and manage your overall financial picture.
- To meet creditor requirements: While it varies from one to the next, some creditors may insist on the account closure as a condition of the settlement agreement.
- To demonstrate commitment: Closing accounts can show creditors and debt settlement companies that you’re serious about resolving your debt issues, which may benefit you during the negotiation process.
However, there are also valid reasons for keeping some credit cards open during and after debt settlement:
- To maintain your credit score: The length of your credit history and your credit utilization ratio are significant factors in your credit score, and closing your credit cards can temporarily lower your credit score by impacting these factors. Conversely, keeping older accounts open with low balances can potentially benefit your credit profile over time.
- To start rebuilding credit: Responsibly using a credit card after a debt settlement can help you rebuild your credit over time. And, having a history of closed accounts may make it more challenging to obtain new credit in the future, so keeping one or two cards open and using them responsibly can be a smart move in limited circumstances.
- For convenience: Credit cards offer convenience and an extra layer of safety for certain transactions, such as online purchases or travel reservations. Certain cards also come with other perks, like rewards points, cash back or low introductory rates, and when used responsibly, these types of benefits can be quite valuable to the right cardholder.
How to manage your credit cards during debt settlement
If you decide to keep some credit cards open, you may want to consider these strategies as part of your new approach to credit card usage:
- Prioritize accounts: Keep one or two cards with the longest history or best terms and consider closing newer or high-fee accounts.
- Reduce limits: Request lower credit limits on open cards to reduce the temptation to overspend.
- Avoid digital wallets: Delete any saved card information from online shopping sites and apps to discourage impulsive purchases.
- Plan your purchases: Make occasional small purchases and pay them off immediately to keep the accounts active and demonstrate responsible use.
The bottom line
While you don’t necessarily have to close all your credit cards when settling debt, it’s a decision that requires careful consideration. For some, closing all credit cards provides a clean slate and removes the temptation to accumulate more debt. For others, keeping select accounts open can be a strategic move for maintaining credit health and financial flexibility. Ultimately, though, the goal of debt settlement is to resolve your current financial difficulties and set yourself up for a more stable financial future.
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Reverse mortgages are regularly marketed to seniors as a solution for those who want to use equity in their homes as a source of retirement income. An alternative to home equity loans or home equity lines of credit (HELOCs), reverse mortgages work very differently than a typical home loan.
When you take out a reverse mortgage, you receive either a lump sum payment, a fixed monthly payment for a set time, or a fixed monthly payment for the duration of the time you’re in the home. You continue living in the house and must maintain it and pay taxes and insurance, but you don’t have to make mortgage payments. Instead, your loan is repaid from the home’s equity when you sell or pass away.
Reverse mortgages make good sense in certain situations, especially those from the best reverse mortgage companies. With many seniors struggling with high costs — even as inflation cools and interest rates begin to fall — a growing number of retirees could potentially benefit from a reverse mortgage. Unfortunately, not all older Americans understand how they work or know how to decide if a reverse mortgage or HELOC is best.
The good news is that learning some key facts about reverse mortgages can help clear up some of this confusion, and provide more insight to seniors on how reverse mortgages work, how they’re paid for, and when to borrow.
Start exploring the reverse mortgage options available to you here now.
5 important reverse mortgage facts seniors should know
Here are five critical facts to keep in mind for seniors considering a reverse mortgage right now:
You need to be 62 and older
The first key thing to know about reverse mortgages is that only seniors can qualify for them.
As Lisa Gaffikin, a home loan specialist at Churchill Mortgage explains, “a reverse mortgage is intended for borrowers over age 62.”
While there are some limited options for those 55 and over, they are generally for jumbo or proprietary programs only. With most lenders, the age limit is so strict that those who want a reverse mortgage but who share a home with a younger spouse would need to remove the younger spouse’s name from the title.
Check your reverse mortgage eligibility online today.
You’ll be limited in how much you can withdraw
With a traditional mortgage, banks decide how much money property owners can borrow based on their debt and income. Things work differently for a reverse mortgage, with Gaffikin explaining that these loans are often available to seniors with limited funds who might be unable to qualify for a home equity loan or HELOC.
Rather than income or credit scores, lenders set borrowing limits for a reverse mortgage based on age, the interest rate you’re offered on your loan and how much the home is worth. If your home appraises for a high price, if you’re older, or if you qualify for a lower interest rate, you’ll be eligible to borrow more than a younger person or someone whose home isn’t worth as much.
Your loan balance will grow over time
With most mortgage loans, including home equity loans and lines of credit, you make monthly payments and your balance declines over time.
With a reverse mortgage, Gaffikin explains that no monthly payments are necessary, making them an ideal option for those who can’t afford to add another obligation to their plate. However, there are consequences to borrowing and not repaying your loan for years or even decades.
“Unlike a traditional forward mortgage, the loan balance grows over time as interest accrues,” explained Josh Lewis, Certified Mortgage Consultant at The Educated Homebuyer. “This will reduce the equity in the home for your heirs to inherit.”
While Lewis explained that “you will still own your home and leave it to your family as part of your estate,” your loan balance will have grown with years of unpaid interest. Your heirs will need to be able to pay the amount you initially borrowed, plus interest that accrued, either by selling the home or taking out a mortgage of their own to cover the costs.
The good news is, there is some protection against owing too much. “The non-recourse feature ensures neither the borrower nor the heirs will owe more than the home is worth at the time is it sold,” explained Neil Christiansen, a Colorado-based Home Loan Specialist for Churchill Mortgage.
You must fulfill your responsibilities as a homeowner
It’s critical for every senior who takes out a reverse mortgage to understand that this loan comes with responsibilities that must be fulfilled.
“You will still be responsible for paying your property taxes, insurance, and home maintenance,” Lewis explained. “Many seniors don’t realize that failing to do so can lead to foreclosure, even with a reverse mortgage. Improvements to the program in recent years require lenders to confirm your financial ability to pay for these items but it’s an important consideration.”
If you don’t keep up with home maintenance or you miss tax, HOA or insurance bills, the lender will move to take your home. You could also face foreclosure if you don’t live in the home for 12 or more months.
You could face higher costs
Finally, it’s worth noting that reverse mortgages may not come with monthly payments, but that doesn’t always mean they’re affordable in the long run.
“While a reverse mortgage can be a great option, interest rates are typically higher than traditional mortgages, and upfront costs can be significant,” explained Lewis. “Make sure you understand all costs and compare them with other options like a home equity line of credit.”
Seniors interested in a reverse mortgage can help keep their loan reasonable by shopping around carefully to find the right lender. Paying higher costs also may be worthwhile if a reverse mortgage is the only affordable way to tap into equity.
As Gaffikin pointed out, these types of loans can make it possible to stay in your home and lower your monthly obligations — and they’re available even if you have too little cash flow to qualify for a traditional home equity loan or line of credit.
If you do have the money to make monthly payments and want to tap equity, you should consider all the alternatives. You may decide making a monthly payment on a home equity loan or line of credit is worth the tradeoff for a more affordable loan with a balance that declines over time rather than increases.
Ultimately, a lot depends on whether you want to pay the loan costs now or leave them for the next generation — and your financial circumstances while determining which of those options is best for you.