Money Health

Reduced Debt Burden — The Proof is in the Pudding

Reduced Debt Burden
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When it comes to financial health, there is something even more foundational than credit scores: indebtedness. In fact, indebtedness is the second most important category within FICO® Scores, accounting for approximately 30% of the score. Additionally, some organizations such as the Financial Health Network, list debt load as a key component of financial health1.

We previously shared results regarding FICO® Score migration while in the program. Here’s a related but augmented view. As the FDR debt settlement program progresses, FDR Graduates experienced a reliable and consistent reduction in the amount of unsecured debt owed2. The blue columns in Figure 1 below illustrate how settling and resolving outstanding accounts not only drove the overall debt burden down during the program, but also improved FICO® Scores, represented by the gray line. At the time of enrollment, the median unsettled balance was $28,000. Forty-five months later, that amount dropped to $3,800.

Figure 1 — Median FICO® Score and Debt Reduction Over Time For FDR GraduatesMedian FICO® Score and Debt Reduction Over TimeFigure 1 illustrates the median FICO® for FDR Graduates and tracks that against the progression of the settled balances during the months in the program. As the client progresses through the debt settlement program, the median unsettled balance decreases. This coincides with the upward trajectory of the FICO® Score.

There are two ways to look at the graph above. A glass-half-empty person may look at the chart above and comment that it is unremarkable because it just illustrates that the business is doing what it is supposed to be doing. From my perspective, it’s powerful for a business to demonstrate that it can deliver positive results to its customers.

The whipped cream on this ice cream sundae is that our clients are empowered in this transaction: within the debt settlement program, debt can only be settled if the consumer agrees to it. The cherry on top is the fact that Freedom Debt Relief will only be compensated once the debt is settled. Wouldn’t you rather work with a business where you only had to pay them if they delivered what they said they would and you would have control over whether to accept that delivery?

The critical fact to draw from the chart above is that the graduate’s debt burden has been substantially reduced through the program. Consumers with too much debt often end up going delinquent on their credit accounts. Once delinquencies happen, fees and higher interest start kicking in, and debt loads increase. Rather than making the consumer’s problem harder to solve by providing more credit at higher rates, debt settlement can provide a financially distressed consumer with a path off this vicious cycle. In the next post, I’ll go into greater detail about how debt settlement positions the consumer for longer term success.

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1 Center for Financial Services Innovation (now known as the Financial Health Network). Eight Ways to Measure Financial Health, May 2016.
2 The analysis presented is based off of a retrospective analysis of Freedom Debt Relief Graduates who enrolled from March 2014 through May 2014. 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 score and enrolled debt, but rather a backward looking observation of what has happened to our clients’ credit scores and enrolled debt 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.