Money Health

Developing The Financial Muscle Memory For Long Term Financial Health

Financial Muscle Memory
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I often use the analogy of losing weight when talking about improving credit scores. This analogy works even better when talking about improving financial health. Health pundits would argue there’s an obesity epidemic and likewise, personal finance experts will say most consumers have too much debt. Losing weight is hard, but what’s harder is losing weight and then keeping it off. This is the power of debt settlement.

Successful weight loss often hinges upon a material change in lifestyle. And this is where the importance of habit comes in. Debt settlement reinforces responsible credit behavior. In a debt settlement program, the consumer is required to pay into a dedicated account every month. This dedicated account is owned by the consumer and can only be used to settle debt that is authorized by the consumer. We use the term “financial muscle memory”, because this regimented payment plan reinforces responsible behavior that has a lasting impact after completion of the program. This is best illustrated by following two graphs.

Figure 1 shows the typical outstanding credit card debt at time of enrollment is about $28,0001. Two years after graduation, that number drops to $3,300. This is more in line with the national median. Figure 2 looks at delinquency rates and credit card utilization. At the time of enrollment 45% of FDR enrollees had a delinquency in the past year. Two years after graduation, the delinquency rate was only 27%, far closer to the national median of 20%. Likewise, half of the FDR enrollees have credit card utilization that exceeds 75%. Two years after graduation, this number was reduced to 36%, far closer to the national median of 15%.

Figure 1 — Freedom Debt Relief Graduates’ Median Outstanding Credit Card Debt

Graduates’ Median Outstanding Credit Card Debt

Figure 2 — Freedom Debt Relief Graduates’ Median Delinquency & Median Credit Card UtilizationGraduates’ Median Delinquency & Median Credit Card Utilization

You can see how the experience of debt settlement continues to positively impact graduates two years after graduation. The value of debt settlement is not limited to the reduction of debt. The real benefit is the sustained improvement to financial health because of responsible credit behavior through lower delinquency rates, lower credit card indebtedness, and lower credit card utilization. The routine of paying into a dedicated account every month reinforces responsible credit behavior that continues to pay dividends for the consumer well after the program has ended.

Out of all the results I’ve seen in the study, these are the ones that leave me the most excited because it shows a transformational change for the consumer that continues long after their time with Freedom Debt Relief.

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1 The analysis presented is based off of a retrospective analysis of Freedom Debt Relief Clients who enrolled in the program between March 2014 and May 2014, and Freedom Debt Relief Clients who graduated from the program between March 2015 and May 2015. Data was procured from a Credit Reporting Agency to facilitate the study. The results presented do not represent a guarantee of what will happen to a client’s credit history, but rather a backward looking observation of what has happened to our clients’ credit history over time.

Freddie Huynh is Vice President of Data Optimization for Freedom Debt Relief where he is responsible for identifying new and better ways to use data to enhance their debt relief program. Previously, he spent 3.5 years at Freedom Financial Asset Management re-architecting the credit risk infrastructure to deliver some of the best returns within the marketplace lending industry. Freddie also spent 18+ years at FICO where he oversaw the development, maintenance, and analytic support for FICO® Scores and was the architect of FICO® Score 8 and FICO® Score 9. Also a financial writer and contributor, Freddie holds a B.A. in Mathematics from Claremont McKenna College and an M.S. in Operations Research from Stanford University.