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What Effect Debt Consolidation May Have on Your Credit
- Is it possible to get debt consolidation without hurting credit?
- Parameters that affect your credit score
Over the last year the credit rating of many extensive borrowers in United States has significantly deteriorated. One of the main reasons for a combined drop in credit scores was partially caused by the revaluation of credit portfolios by credit card companies and readjustment of the ratings of borrowers for current levels of risk.
In other words, an average American borrower has approximately USD 18,000 of unsecured credit card debt outstanding with the average credit rating of 720-750 over the life of his/her credit. If he/she has signalled any potential “red flags” to the credit card company such as inability to do regular monthly payments or communicating additional information such as loss of employment, the credit card company is very likely to impose penalties and decrease borrower’s credit rating to 670 or lower. Needless to say, that the natural intention of any borrower is to improve credit rating or, in the worst case scenario, to prevent it from deterioration.
Graph 1: Improvement of Credit History via Debt Consolidation
When thinking about alternative ways of financing and consolidation of outstanding credit card debts, many borrowers worry about how debt settlement affects your credit. If you consider all factors influencing your credit rating, debt consolidation is definitely one of ways to prevent credit rating from falling and even can help to improve it. In order to arrange debt consolidation without hurting credit, you should possess some sort of valuable asset, preferably house or apartment, which you can leverage on. Many mistakenly think that new larger debt can hurt your credit score, yet, it is not true if you know what the parameter affecting your debt score are.
Your credit card score is likely to decrease if your are late on payments, if you continue to pay only minimum amount for a significant period of time, if you do not leave any credit buffer on your credit card of at least 10% of total credit limit and if your income-to-debt ratio according to credit card statistics is low. By arranging debt consolidation you replace unsecured debt by secured collateralised debt. It may lower your weighted average credit ratio due to the larger amount.
However, it would help you to avoid being subject to the potential danger of credit score downgrading mentioned above. When borrowers ask how bad does debt settlement hurt your credit, they forget to ask how bad continues outstanding debts such as credit card debts affect hurt your credit. If you compare both, consolidated debts would hurt your credit score to much lesser extent than failing on credit parameters for outstanding credit card debts.
Do not forget that new consolidated debt has larger maturity, lower monthly payments and is secured, which puts you into much less danger zone that exposure to credit cards. Of course, you should make sure that you stick to the monthly payments and other obligations on consolidated debt as per terms and conditions. Otherwise, you could be running into danger of losing your house as a result of the repossession by funding providers. But on the whole, arranging debt consolidation without hurting your credit is a very realistic strategy for the borrowers with high unsecured debt levels.