Does Freedom Debt Relief Affect Your Credit Score?

How Freedom Debt Relief May Affect Your Credit Score

Enrolling in a debt settlement program like Freedom Debt Relief can provide a path to financial freedom, but it's a journey that often involves a temporary, significant impact on your credit score.

1. Initial Payment Halt: The process typically begins with you stopping direct payments to your creditors and instead depositing funds into a dedicated savings account. This halt in payments leads to delinquency on your accounts.
2. Negative Reporting to Bureaus: Your creditors will report these missed payments to the major credit bureaus. Since payment history is the most significant factor in your credit score, this delinquency will cause your score to drop.
3. Charge-Offs and Collections: As accounts become further past due, they may be charged off by the original creditor or sold to a collection agency. These are serious negative events that further damage your credit report.
4. Settlement Notation on Report: Once a settlement is negotiated and paid, the account on your credit report is typically updated to show it was "settled for less than the full amount," which is viewed less favorably than an account "paid in full."
5. Path to Recovery: After completing the program, your score can begin to rebuild as you establish a new, positive payment history. The negative marks from the settlement process, however, will remain for up to seven years.

How Much Will Freedom Debt Relief Affect Your Credit Score?

Enrolling in a debt settlement program like Freedom Debt Relief can have significant, and often negative, short-term effects on your credit score. Here are a few key factors to consider before making a decision.

• Initial Score Impact: The program may require you to stop paying creditors, leading to missed payments and defaults on your credit report. This action will almost certainly cause a substantial, immediate drop in your credit score.
• Account Status After Settlement: Settled accounts are marked on your credit report as "paid-settled" or a similar notation. While better than an unpaid charge-off, this remains a negative mark for seven years from the original delinquency.
• Long-Term Recovery Path: After completing the program, your score can begin to recover as you establish a new history of on-time payments. The goal is improved long-term financial stability, not immediate credit score gains.

How You Can Avoid Freedom Debt Relief Affecting Your Credit Score

Maintain Consistent Program Payments

Making timely payments into your dedicated program account is crucial. This is the money used for negotiations with your creditors. Missing payments can delay the process, prolonging the period of negative credit reporting and potentially causing the settlement plan to fail entirely.

Understand the Initial Credit Impact

Be prepared for an initial drop in your credit score. The debt settlement process requires you to stop paying creditors directly, which results in delinquencies. Understanding this is an expected, temporary phase can help you manage expectations as you work toward becoming debt-free.

Monitor Your Credit Report

Regularly check your credit reports from all three major bureaus. This allows you to verify that settled accounts are being reported correctly as "paid-in-full" or "settled for less than the full amount." Disputing any inaccuracies promptly is key to your credit's recovery.

Ways to Improve Your Credit Score

Improving your credit score is entirely possible with consistent, positive financial habits. There are several proven methods you can use to boost your creditworthiness and achieve a healthier financial profile, with most people seeing meaningful changes within three to six months.

• Monitor your credit reports. Regularly obtain and review your free credit reports from all three major bureaus to identify and dispute inaccuracies or signs of fraud.
• Establish automatic bill payments. Since payment history is the most significant factor in your score, setting up automatic payments is a simple way to ensure you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your balance below 30% of your total credit limit, as high utilization can negatively impact your score.
• Become an authorized user. Being added to a credit card account of someone with a strong payment history and low utilization can help build your own credit profile.
• Diversify your credit mix. Lenders favor a healthy mix of credit types, such as installment loans (like auto or student loans) and revolving credit (like credit cards).
• Limit hard inquiries. Avoid applying for too much new credit at once, as multiple hard inquiries in a short period can temporarily lower your score.

The Bottom Line

Engaging with Freedom Debt Relief can provide a solution for unmanageable debt, but be aware that the debt settlement process will negatively affect your credit score due to missed payments.

Frequently Asked Questions

Will my credit score drop when I enroll in Freedom Debt Relief?

Yes, your credit score will likely drop. The program requires you to stop paying creditors, which leads to missed payments being reported to credit bureaus.

How long does it take for a credit score to recover after debt settlement?

Recovery time varies, but it can take several years. Rebuilding credit begins after debts are settled by establishing a new, positive payment history over time.

Is debt settlement better for my credit score than bankruptcy?

Both negatively impact your credit. However, a Chapter 7 bankruptcy can stay on your report for up to 10 years, often longer than settled accounts.