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The Disadvantages of Consolidating a Financial Statement

by
author image Jonathan Croswell
Jonathan Croswell has spent more than five years writing and editing for a number of newspapers and online publications, including the "Omaha World-Herald" and "New York Newsday." Croswell received a Bachelor of Arts degree in English from the University of Nebraska and is currently pursuing a Master's of Health and Exercise Science at Portland State University.
The Disadvantages of Consolidating a Financial Statement
A man is reviewing a financial document. Photo Credit LUHUANFENG/iStock/Getty Images

Overview

Consolidating a financial statement is a significant decision, whether you are an individual or a business looking to bolster your financial profile. There can be some significant advantages to consolidating, such as a greater access to credit and interest rates. But the potential advantages can be easily erased by some of the pitfalls of consolidation. For this reason, it's important to understand the potential impact of consolidating before following through.

Credit Implications

Just as much as consolidation can improve your credit, you can also lower your credit profile by consolidating with a person or business with worse credit than your own. Unless both parties have similar credit profiles, it is likely that one party is taking a hit to their credit to some degree. This can be minimal depending on the advantages of other factors, but it could be a significant impairment to your ability to get lines of credit at good rates. If this person is a spouse, you may find yourself getting better credit and interest rates by not consolidating your financial statements and remaining financially independent.

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Shared Information

It is important to trust the individuals involved in your consolidation. If the financial change is between spouses and individuals, it is likely you already trust that person with having access to your personal financial history and credit information. In a business situation, though, this can be dangerous -- allowing untrustworthy individuals access to your business' financial statements, credit history and other information which can be mishandled or used to attack your company.

Changed Debt-to-Income Ratio

Different individuals and businesses have different amounts of debt and income. A healthy debt-to-income is desired, with debts comprising only a fraction of total earned income. The smaller this ratio is, the better for both your credit and financial stability. Because of the multiple ways in which this can affect your personal finances or a company's financial profile, it is important that the debt-to-income ratios of all parties be examined. If you are taking on much more debt at the gain of minimal income -- particularly income that does not cover the debt or does not seem promising -- your party may be at a distinct disadvantage.

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References

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