7 Common Questions About Debt Consolidation and Your Credit Score
Millions of people struggle with unmanageable levels of personal debt. Those looking to escape the debt cycle may be considering debt consolidation. Freedom DR offers debt consolidation and other solutions that help clients get debt-free without resorting to bankruptcy.
You may have heard that these types of programs can have a negative effect on your credit score. While it’s true that using a structured approach to manage debts can knock your credit score down over the short term, it may surprise you that the negative impact on your credit score is usually temporary. And debt consolidation can help a great deal over the long term, as eliminating cumbersome debt is the key to rebuilding and maintaining your creditworthiness.
Freedom DR recently partnered with Experian, Equifax, and TransUnion to conduct a study that quantifies exactly how the company’s debt programs affect consumer credit scores. The research took four years to complete and uncovered several encouraging trends:
- Clients who go through the entire Freedom DR program achieve a significantly reduced debt burden
- Client credit scores fall a bit during the first six months before making strong recoveries
- Clients emerge from the program with vastly improved money management habits
Let’s take a closer look at how the Freedom DR program interacts with clients’ credit scores by answering a few common questions.
1. How Do Debt Consolidation Programs Work?
Freedom DR’s approach is to work directly with creditors so clients can pay off their debts with lower monthly payments and lower total debt owed. After Freedom DR works with a client’s creditors, the client makes regular monthly deposits into a specialized, FDIC-protected account. These funds are then used to systematically pay off creditors.
This process continues, month in and month out, until all enrolled debts have been eliminated.
2. How Does the Freedom DR Approach Impact Clients’ Credit Scores?
One of the first steps in the Freedom DR program is to stop making scheduled payments on your existing debts. This demonstrates financial stress to your creditors, creating the opportunity for Freedom DR to work with your creditors.
However, it will also cause your credit score to go down because creditors will report your non-payments to credit bureaus. There’s also good news: within about six months, the majority of credit scores begin to recover as the client uses their FDIC-insured account to fund regular payments to their creditors.
3. What Is Meant by “Debt Burden,” and Why Is It Such an Important Concept?
A consumer’s “debt burden” refers to the amount of debt they are carrying relative to their income. The greater the percentage of your income that goes toward reducing your debt, the higher your debt burden.
People with high debt burdens struggle to save money and typically cannot secure mortgages or loans at reasonable interest rates. This contributes to a precarious personal financial situation and severely limits your financial freedom.
One key benefit of the Freedom DR program is its ability to reduce your debt burden while simultaneously helping your credit score recover. Here’s a look at some relevant data drawn from Freedom DR’s recent four-year study:
Freedom Debt Relief Graduates’ Reduced Debt Burden*
4. What Will Happen to My Credit Score Over the Course of the Freedom DR Program?
Because clients stop making payments on their debts when they start the program, their credit scores temporarily go down. A steady recovery cycle begins within about six months. By the end of the program, most clients see their scores return to levels similar to where they were at the outset.
According to the recent study, Freedom DR clients entered the program with an average credit score of 650 and graduated with credit scores of 648, with a typical timeline of four years (48 months).
FICO Score Recovery
5. How Does This Program Help My Credit Score in the Long Run?
Two important factors make up about 65% of a consumer’s credit score:
- Credit card utilization: Expressed as a percentage rate, this metric looks at a consumer’s total credit card spending limit, then examines how much of that limit is currently used. For example, if you have credit card balances totaling $8,000 on credit cards with a combined credit limit of $10,000, your credit card utilization rate would be 80%.
- Payment history: When you make your scheduled payments on time, your credit score climbs. When you do not, it falls. Over time, your tendency to pay on time (or not) creates up your payment history.
Freedom DR reduces your credit card utilization rate while building a strong history of on-time payments. So, your credit score should begin to recover since these two factors account for almost two-thirds of everything a credit reporting bureau considers.
6. How Do Graduates of the Freedom DR Program Tend to Fare Once They Complete the Program?
Freedom DR’s four-year study found that a large number of clients saw their scores continue to improve after graduating from the company’s debt consolidation program. The following graph illustrates typical client credit score results two years after leaving the program:
Post-Program FICO Score Recovery
7. Beyond Eliminating High-Interest Debts, What Other Advantages Do Clients Enjoy by Participating in the Freedom DR Program?
Escaping the debt cycle and getting on the road to long-term financial recovery represent the two main advantages of signing up with Freedom DR. However, there are many others. Graduates of the program report vastly improved financial habits, including:
- Improved financial self-discipline
- Using credit cards to finance major purchases less often and instead saving up to pay with cash
- Reduced financial reliance on credit cards and other borrowed sources of money
Here’s a closer look at how graduates of the program fared with their credit utilization and payment histories over the long term:
Freedom Debt Relief Graduates’ Responsible Credit Behavior
Could Freedom DR Be a Good Option for You?
Freedom DR has helped many people escape the debt cycle and find a proven path to long-term financial health. It might be the right approach for you, depending on the particulars of your situation.
The best way to determine whether you’re a fit for Freedom DR is to discuss your situation with one of the company’s certified debt consultants. This session is free and comes with no obligation — get started right now to get your free quote.