Freedom debt relief – what is it and how it affects your credit score

Freedom debt relief

The state of your credit score is basically a sort of snapshot of your current overall financial state. There are three main credit bureaus in the U.S. issuing and compiling various credit reports to the American consumers. Generally, every American adult citizen has a FICO credit score.

FICO credit score

FICO credit score
FICO credit score

A FICO credit score normally ranges from a poor score of 300 to a stellar credit score of 850. Many people in the United States fall somewhere in between. If your FICO credit score is below 620, then your credit score would be considered as fairly good or poor. In most cases, scores around 600 are considered as good or at least as acceptable. However, if your credit score exceeds 750, it would be considered as excellent. When you are applying for a car loan, a mortgage or a credit card, the loan lending company that you work with will usually get your credit score from one of the three credit bureaus that we have mentioned. That means that the state of your credit score may vary depending on what specific credit bureau the loan lending company decides to use. However, your credit scores from all three bureaus should be roughly the same, unless, of course, there are big chunks of information missing. What ultimately determines the state of your credit score are the financial decisions that you make over rather long periods of time. There are many financial decisions that can have both a negative and a positive impact on your credit score. In case you want to improve the state of your credit score, it is of great importance to have a better understanding of the financial decisions that you are making and how they can affect your credit score.

In case you are reading this article, there is a pretty big chance that you are having difficulties with one or maybe multiple debts. Most types of debts often come with pretty high interest rates which can be pretty hard to deal with. If you use debt such as personal lines of credit and credit cards and you use them carelessly, you may find yourself in a really difficult position. When people are dealing with multiple debts, it can be quite stressful and exhausting which can lead to some not-so-smart financial decisions. It is important that when you consider your debt-relief options. To think about how these options may affect your credit score, you need to look at the big picture and think how your decisions will play out in the long run.

Debt relief options

Debt relief options

If you have struggled with your debts for a long period of time and still have not managed to reach the point of debt freedom, you may want to consider some debt relief options. When you want to use a credit counseling service or want to get a debt consolidation loan, you will have two main debt relief options:

  • Debt settlement
  • Bankruptcy

Whether you choose to go with a debt settlement or a bankruptcy, keep in mind that both debt relief options will have a significant impact on your credit score. However, if your credit score takes a hit means that you would be able to regain control over your finances, then that is a price that you would have to pay. Let’s dive into both debt relief options so that you can have a better understanding and ultimately be able to make a better choice for your financial future.

 

  • Filing for bankruptcy

 

Filing for bankruptcy
Filing for bankruptcy

The first debt relief option that we are going to discuss is bankruptcy. If used correctly, bankruptcy can be an extremely useful debt relief method. In case you file for Chapter 7 bankruptcy (which is the most common way for filing bankruptcy), a court-appointed trustee might seize control of most of your assets. And because your secured creditors will most likely be entitled to acquire or sell your assets that you have secured your loans with, in case of a Chapter 7 bankruptcy, you may not be able to keep your house or your car.

 

  • Bankruptcy should most likely not be your first choice, as it will impact your credit score for the next 7 or even 10 years, so unless the situation you are in really calls for it, you should probably avoid that debt relief option.
  • If you choose to declare bankruptcy, you need to be prepared for the fact that your credit score will probably take a big hit. Your credit score is going to drop depending on what is its state was prior your bankruptcy filing. Basically, the higher the state of your credit score was before you filed for bankruptcy, the more it is going to drop afterwards.
  • Your credit scores serve as an indicator to the creditors as a sign of your credibility. It shows how big of a chance there is for you to make bad financial choices. Therefore, declaring bankruptcy can really affect your credit score and with that, the way that creditors see you. Filing for bankruptcy will definitely have a much bigger negative impact on your score compared to a debt settlement.
  • In case you have a credit score of 800 points before you declare bankruptcy, the chances are that it is going to drop with about 250 points or more. If you had a credit score around 600, after filing for bankruptcy it will most likely drop with about 150 points.

 

  • Debt settlement

 

Debt settlement
Debt settlement

Debt settlement can be a far better choice compared to bankruptcy for several reasons. Keep in mind that most financial experts consider debt settlement to be a much better option than bankruptcy is. One of the main reasons for that is the rather light effect that debt settlement can have on an average borrower’s credit score.

  • When you get into e debt settlement program, you need to be prepared for the almost inevitable, which is the drop of your credit score. Same as with bankruptcy. After a debt settlement, your credit score is not going to be the same. And again, as with filing for bankruptcy, the higher your credit score is, the bigger the drop.
  • With that being said, however, the credit score drop that you will experience after a debt settlement will be lesser and shorter-lived compared to the bankruptcy drop. If you need a direct comparison, the average credit score drop after debt settlement is half the credit score drop after bankruptcy. That lesser credit score drop will make it a lot easier for you to start rebuilding your credit score once you have your finances under control. Due to the fact that after a debt settlement your credit score will not be in such a bad shape to begin with, you will be able to build the credit score that you desire and have a more stable financial life.

Conclusion

There are many other reasons to why you should choose debt settlement over bankruptcy. The more information you have, the easier it will be for you to make your choice according to your own specific financial situation.

 

 

 

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