Credit scores are determined not only by your payments, but also by the amount of credit you have versus the amount you use. Credit scores are also partially determined by your “mix” of credit. You want to have active credit card accounts, and installment payment accounts such as a car loan or mortgage. If you cancel your credit cards in an attempt to keep your debt-to-income ratio at the same levels, then you’ve eliminated a third factor in your credit scoring – length of time for active accounts.

So what can you do instead of debt consolidation? The standard advice tends to be the best advice – start with a credit card that has the highest interest rate and pay it down first. Conversely, if you have credit cards that have a very small balance, pay those off first and then work towards paying off the ones with higher interest. If you work your way through your credit card debts systematically, you can make a difference in your credit scores.

The absolute worst thing you can do is get a debt consolidation loan and then max out the cards you just paid – not only does that leave you in a worse position financially, but it also makes it extremely difficult to qualify for credit in the future, as these types of actions are seen as high-risk by creditors. If you have a debt consolidation loan in progress, keeping your credit cards active by using them for a nominal purchase ($50 or less) may help you to lessen the potentially negative impact on your credit score. Keep in mind that you should only use the cards if you know you can pay them back in full – use them to purchase items that you would normally pay for in cash or check, and then use those funds to pay off the credit card instead.

Once you have your balances lowered, you want to keep them that way – try not to charge more than 10% – 30% of your available balance each month, and pay it off month to month. You don’t have to carry a balance in order to show a positive credit history, but you do need to have consistent charges that get paid on a monthly basis. If you’re really set on a debt consolidation loan, avoid using one that will tie up your home equity. Instead, get a personal loan through your bank or credit union, and use it to cover the amount of your high interest rate credit cards. In this way, you can continue to make payments on the lower interest cards, and maintain the balance of your credit mix.

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• Use Unemployment Pay Wisely – if you qualify for unemployment, you may be tempted to try to maintain your current lifestyle for as long as possible while searching for a new job. This strategy may not be in your best interests, as unemployment generally does not pay as much as your typical wage. If you do not have savings to fall back on during this time, your best choice is to scale back on what you spend as much as is reasonably possible. Also remember, you’ll need to continue your job search in order to qualify for unemployment, so be certain to keep records of the places to which you’ve applied.

• Prioritize Debt – if you are unemployed and cannot pay all of your bills, it may be time to prioritize. Pay essential bills first, such as the mortgage, electricity, and grocery bills. Bills for expenses such as the telephone or cable television may have to wait, however, you should always keep your creditors informed of the situation before collection notices start arriving.

• Reduce Financial Obligations – drawing from the example above, if you do have cable service, you may wish to cancel it until you have found employment. Likewise, you may wish to cut back on other non-essentials as well. Sometimes, these companies will let you ‘freeze’ an account rather than closing it. This lets the company keep your information on file for when you decide to reactivate the service. However, keep in mind that there may still be fees involved if you go this route.

• Negotiate with Creditors – once you’ve prioritized your debt and eliminated or minimized non-essential financial obligations, you should contact your creditors in order to negotiate payment arrangements that are more favorable to you. Some utility companies may offer you an extended time period in which to pay. Likewise, the bank may extend your payment options on your mortgage, or offer a revised payment schedule until you find a new job. If you show good faith in your intentions to pay, you may be able to avoid having your debts reported to the credit bureau even if you are technically late with some payments.

Avoid the temptation to try to pay for everything with credit cards while you look for your next job. While some emergency purchases may be necessary, paying off all of your bills with your credit cards may only get you into deeper financial trouble if you remain unemployed for longer than a few months. As interest on the charges build, you will likely end up paying far more than if you simply negotiate new terms with your current creditors up front. By taking a proactive stance with your finances, you can reduce the damage to your credit score, and maintain your financial health while seeking new employment.

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