Does freedom debt relief ruin your credit?

Facing overwhelming debt can be a daunting and stressful experience. Freedom Debt Relief is a popular debt settlement company that offers a potential path towards financial freedom. However, before enrolling in their program, it's crucial to understand the potential impact on your credit score. This comprehensive guide will delve into how Freedom Debt Relief, and debt settlement in general, can affect your credit and what you need to consider before making a decision.

Understanding Debt Settlement and Freedom Debt Relief

Debt settlement involves negotiating with your creditors to pay a lump sum that's less than the total amount you owe. Freedom Debt Relief acts as an intermediary between you and your creditors, negotiating on your behalf. The process generally works like this:

1. Initial Consultation: You'll discuss your financial situation with a Freedom Debt Relief consultant.
2. Program Enrollment: If you qualify, you'll enroll in their program and begin making monthly payments into a dedicated savings account.
3. Negotiation: Freedom Debt Relief will contact your creditors and attempt to negotiate settlements.
4. Settlement Acceptance: Once a settlement is agreed upon, you'll authorize Freedom Debt Relief to use the funds in your savings account to pay the agreed-upon amount.

While debt settlement can seem appealing, it's important to understand that it's not a quick fix and comes with potential consequences.

The Impact of Debt Settlement on Your Credit Score

The most significant impact of Freedom Debt Relief, like any debt settlement program, is its potential negative effect on your credit score. Here's how it can affect your credit:

1. Payment History is the Key Factor

Your payment history is the most crucial factor in determining your credit score, accounting for approximately 35% of your FICO score. During the debt settlement process, you'll typically stop making regular payments to your creditors. This is a necessary step to accumulate funds in your savings account to be used for settlements.

However, when you stop making payments, your creditors will report these missed payments to the credit bureaus. These missed payments will appear on your credit report and significantly lower your credit score. The longer you go without making payments, the more severely your credit score will be affected.

2. Accounts Go Into Default

When you consistently miss payments, your accounts will eventually go into default. This is a serious negative mark on your credit report and can severely damage your credit score. A default notation indicates to lenders that you have a history of not fulfilling your financial obligations, making it difficult to obtain credit in the future.

3. Collection Accounts

If creditors are unsuccessful in negotiating a settlement or receiving payment from you, they may sell your debt to a collection agency. The collection agency will then attempt to collect the debt from you. A collection account on your credit report is another negative item that can significantly lower your credit score.

4. Lawsuits and Judgments

In some cases, creditors may choose to sue you in court to recover the debt. If the creditor wins the lawsuit, they will obtain a judgment against you. A judgment is a legal ruling that you owe the debt. Judgments can also appear on your credit report and negatively impact your credit score. Furthermore, a judgment may allow the creditor to garnish your wages or place a lien on your property.

5. The Settlement Itself is Reported

Even if you successfully settle your debts, the settlement itself can have a negative impact on your credit. Creditors may report the settled debt as "settled for less than the full amount." While this is preferable to a default, it still indicates that you did not fulfill your original obligation and can slightly lower your credit score.

The Severity of the Credit Score Drop

The extent to which your credit score will drop depends on several factors, including:

• Your initial credit score: Individuals with higher credit scores tend to experience a more significant drop when negative items are added to their credit report.
• The number of accounts included in the debt settlement program: The more accounts included, the greater the potential impact on your credit score.
• The length of time you go without making payments: The longer you are delinquent, the more severely your credit score will be affected.
• The age of your existing credit history: A shorter credit history is more vulnerable to negative impacts.

Generally, you can expect your credit score to drop significantly when participating in a debt settlement program. It's not uncommon for individuals to see their credit scores decrease by 100 points or more.

Rebuilding Your Credit After Debt Settlement

While debt settlement can damage your credit in the short term, it's possible to rebuild your credit over time. Here are some strategies to consider:

1. Make All Payments On Time

The most important step in rebuilding your credit is to make all of your payments on time, every time. This includes credit cards, loans, and other financial obligations. Consistent on-time payments demonstrate to lenders that you are a responsible borrower and can help to improve your credit score.

2. Keep Credit Card Balances Low

Credit utilization, which is the amount of credit you're using compared to your total available credit, is another important factor in determining your credit score. Try to keep your credit card balances below 30% of your credit limit, and ideally below 10%. This demonstrates to lenders that you are not over-reliant on credit and can manage your finances responsibly.

3. Become an Authorized User

If you have a friend or family member with a credit card and a good credit history, ask if you can become an authorized user on their account. As an authorized user, the card's payment history will be reported to your credit report, which can help to boost your credit score. However, make sure the primary cardholder is responsible with their payments, as their negative behavior can negatively impact your score as well.

4. Consider a Secured Credit Card

A secured credit card is a type of credit card that requires you to provide a security deposit. The security deposit typically serves as your credit limit. Secured credit cards are often easier to obtain than unsecured credit cards, especially for individuals with bad credit. Using a secured credit card responsibly and making all payments on time can help you to rebuild your credit.

5. Monitor Your Credit Report Regularly

It's important to monitor your credit report regularly to ensure that the information is accurate and to identify any errors or fraudulent activity. You can obtain a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year at AnnualCreditReport.com.

Alternatives to Freedom Debt Relief and Debt Settlement

Before opting for debt settlement, explore alternative debt relief options that may have less of a negative impact on your credit:

1. Debt Management Plan (DMP)

A debt management plan (DMP) is a structured repayment plan offered by credit counseling agencies. Under a DMP, you'll typically make a single monthly payment to the credit counseling agency, which then distributes the funds to your creditors. DMPs often involve lower interest rates and fees, making it easier to pay off your debt. While a DMP can still have a slight negative impact on your credit initially, it's generally less damaging than debt settlement.

2. Debt Consolidation Loan

A debt consolidation loan involves taking out a new loan to pay off your existing debts. The new loan typically has a lower interest rate than your existing debts, which can save you money in the long run. A debt consolidation loan can also simplify your finances by combining multiple debts into a single monthly payment. To qualify for a debt consolidation loan, you'll typically need to have good credit.

3. Balance Transfer Credit Card

A balance transfer credit card allows you to transfer your existing credit card balances to a new credit card with a lower interest rate, often a 0% introductory APR. This can save you a significant amount of money on interest charges and help you pay off your debt faster. However, be mindful of balance transfer fees and the APR after the introductory period ends.

4. Bankruptcy

Bankruptcy is a legal process that allows you to discharge your debts. While bankruptcy can provide significant debt relief, it also has a severe negative impact on your credit score and can remain on your credit report for up to 10 years. Bankruptcy should be considered a last resort after exploring all other debt relief options.

5. Negotiate Directly with Creditors

You can try negotiating with your creditors directly to create a manageable payment plan or even a lower settlement amount. Some creditors are willing to work with you, especially if you demonstrate genuine financial hardship. This option requires time and effort but can potentially avoid the credit damage associated with debt settlement.

Factors to Consider Before Choosing Freedom Debt Relief

Before enrolling in Freedom Debt Relief or any debt settlement program, carefully consider the following factors:

• The potential impact on your credit score: Understand that debt settlement will likely damage your credit score in the short term.
• The fees charged by Freedom Debt Relief: Debt settlement companies typically charge fees based on a percentage of the debt you settle.
• The risk of lawsuits: Creditors may sue you to recover the debt, especially if negotiations are unsuccessful.
• The tax implications: Settled debt may be considered taxable income by the IRS. Consult with a tax professional for advice.
• Your ability to stick to the program: Debt settlement requires discipline and commitment. You need to consistently make payments into your savings account and avoid incurring new debt.
• The alternatives available to you: Explore other debt relief options before opting for debt settlement.