Can I Still Use My Credit Card After Debt Consolidation?

Paying off multiple loans and credit card balances by consolidating your debt can seem like a fresh start. However, it’s natural to wonder whether you can still use your credit card after you consolidate debt — especially when an unexpected expense comes up. In most cases, you can still use your credit card after debt consolidation, but whether it’s a good idea depends largely on your spending habits and financial situation.

How does debt consolidation work?

Debt consolidation combines multiple debts into a single balance with a single monthly payment. When you consolidate your debt, you use a loan, credit card or line of credit to pay off your other balances, leaving you with just one balance to repay. Ideally, you’d consolidate your debt to get better terms, such as a lower interest rate or lower monthly payment, which may help make your debt easier to manage.

Paying off a credit card through debt consolidation doesn’t automatically close your account, so you can keep using it.¹ However, debt consolidation tends to work best if you avoid taking on new debt while you pay off your existing debt. Some people choose to close their credit cards after consolidating debt to avoid temptation, but it’s an individual decision.

Three common ways to consolidate debt are a debt consolidation loan, a credit card balance transfer and a home equity line of credit (HELOC). Here’s how each option works:

• Debt consolidation loan: A debt consolidation loan lets you borrow a lump sum of money up front that you can use to pay off your other debts. Then, you repay the loan in predictable monthly payments with a fixed rate and set payoff date.
• Credit card balance transfer: A credit card balance transfer lets you move your existing credit card debt to a different card — usually one with a low or 0% promotional annual percentage rate (APR) for a set period. To make the most of a balance transfer, it’s a good idea to pay off as much of the debt as you can before the promotional period expires.
• HELOC: A HELOC is a line of credit that uses your home as collateral. Collateral is something of value you possess that you use to back a loan or line of credit. With a HELOC, you may borrow up to your credit limit to pay off your other debts. If you don’t repay your HELOC as agreed, the lender could foreclose on your home.¹

Should you use your credit card after debt consolidation?

Even though you probably can use your credit card after consolidating your debt, if your goal is to reduce your debt, it might be better not to.

Using your card for new purchases can be tempting. However, doing so creates new debt, while the debt you consolidated still needs to be repaid to the new lender. Plus, managing a debt consolidation loan or credit card payment with a new credit card balance at the same time could put a strain on your monthly budget.

Building up new balances may also affect your credit score. Paying down your credit card balances generally lowers your credit utilization ratio — the percentage of credit you use compared to your total available credit — which is typically better for your credit score. Adding new charges to your card could reverse that benefit.

When using a credit card may make sense

If you do choose to use your credit card after debt consolidation, it’s best to do it in a way that avoids adding to your debt obligations. There may be times when it’s unavoidable, such as an emergency, but most of the time it comes down to making spending choices that will help you stay on track.

If you’ve consolidated your debt, here are some questions to ask yourself before using your credit card again:

• Can I pay the new purchases off in full at the end of the month? Budgeting ahead of time for credit card purchases and paying them off every month can help you keep your balances from growing.
• Am I keeping track of my credit card purchases? When you juggle multiple credit cards, it can be easy to lose track of your spending. Consider sticking to one card only to keep every purchase more visible.
• Am I still making progress on paying down my balances? It’s a good idea to keep an eye on your progress. If your spending isn’t preventing your balances from coming down, then using your credit card may not be a problem.

How can using a credit card after debt consolidation affect your credit score?

It’s a common assumption that any credit card use will hurt your credit. In reality, the relationship between your card use and your credit score is more nuanced. Your habits matter more than whether you simply have access to a card.²

• Payment history remains the biggest factor: No matter how you consolidate your debt, missing payments will negatively affect your credit score.⁴
• Paying off credit card balances lowers your credit utilization: When consolidation clears your revolving balances, your credit utilization drops. Credit scoring models generally view a lower credit utilization positively because it shows you manage debt well and don’t depend on borrowed money. Your credit utilization ratio is typically the second-largest factor affecting your credit score. Continuing to use your credit card without paying down the balance increases your credit utilization, which can lower your credit score.⁵
• Applying for a new credit card may cause a small, temporary dip: If you open a new credit card after consolidating your debt, your application triggers a hard credit inquiry, which could lower your credit score by a few points for a short time.³

Should you keep your credit card open?

Keeping an account open may help your credit utilization ratio. When a card stays open with a low or zero balance, your available credit stays higher. Keeping accounts open may also help preserve the length of your credit history.⁶

Closing an account may be helpful in certain situations, though. Some people choose to request a lower credit limit or close a credit card account altogether to remove the temptation to spend. Just know that closing an account could may reduce your total available credit and increase your credit utilization ratio.

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Think carefully before you swipe

If you’re going to use a credit card after consolidating your debt, it’s a good idea to use it only when it helps you reach your financial goals.

It’s important to be honest with yourself about your financial situation and spending habits. Think about whether the potential trade-offs of new spending are worth the benefits, and how confident you feel about your ability to manage new credit card debt responsibly. The decision is highly personal, and only you can make it.

Source

1 https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/
2 https://www.experian.com/blogs/ask-experian/can-i-use-credit-card-after-debt-consolidation/
3 https://www.experian.com/blogs/ask-experian/how-credit-cards-can-affect-your-credit-score/
4, 6 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
5 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/
7 https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/