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Title: “Reduce Debt Exposure While Keeping Good Credit History

    1. ways to get out of debt without hurting credit history
    2. risks of debt consolidation for credit rating

It happens very often that people with extensive unsecured borrowing run into problem of being unable to fulfil their financial obligations such as payment of monthly interest rates and repayment of principal.

The delays in repayments may result into deteriorating credit history of an individual. If the borrower has a variety of credit obligations such as outstanding balances on credit cards, personal loans, purchase of a car and any other goods in credit, it is very often difficult to manage all interest payment in time. Moreover, if the borrower runs into any financial difficulties, it is very likely that the credit history may get hurt, which will make it more complicated for the borrower to originate any new credit liabilities in the future.

Are there ways to get out of debt without hurting credit history? The answer to this question is positive and it is feasible to eliminate debt by means of debt consolidation techniques and products that are widely available nowadays in the United States. Currently according to US statistics, volume of consumer debt reached approximately $2.6 trillion. At the same time, in Q4 2007 roughly 4.18% of outstanding credit accounts in United States defaulted as a result of the overdue monthly credit card payments, which is 0.8% higher than in the previous year. This means that potential demand for the consolidated debt is expected to increase in the nearest future.

Old Debts with New Consolidated Debts

 Graph 1: Repayment of Old Debts with New Consolidated Debts


One of the main reasons for arrangement of debt consolidation, apart from reducing monthly interest repayments, is the improvement of the borrowers’ credit history. It is, in a way, a long term intangible investment that increases creditworthiness of a borrower and raises his or her potential ability to have credit exposure in the future.

Debt consolidation has several benefits for the borrower such as lower monthly interest payment, the possibility to have fixed interest rates, which increases future certainty for the borrower, and the possibility to improve credit history. When the borrower uses consolidated debt to repay outstanding credit card balances or personal loans, it positively reflects on credit history for several reasons. There is first immediate positive effect such as repayment of the principal in full at once.  The second positive effect is rather long term, taking place only if the borrower sticks to consistent interest and principal repayments on consolidated loan over at least two years.

However, even though consolidated debt may help the borrower to get out of debt without hurting credit, it also poses the risks of larger debt exposure and often requires the borrower to pay high transaction fees to the financial providers of consolidated loan. Thus, prior to arranging any consolidated loan in order to improve credit history, the borrower should carefully weight all pros and cons and realistically assess his or her ability to fulfil the financial obligations in the future. It is mainly for the reason that if the borrower fails to do so, the deterioration of the credit history would accelerate and hurt the borrower even harder than it was prior to consolidated lending.


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