Your Credit Score vs. Creditworthiness

Credit score vs. Creditworthiness
Noelle Marr September 16, 2021

There’s a lot of talk out there about your credit score—what it is, how to improve it, etc.—and for good reason. Your credit score is an important indicator of your financial health. But it’s actually just one piece of a larger puzzle: your creditworthiness.

When it comes to debt settlement, a common concern is the impact on your credit score. But if you don’t also consider the impact to your creditworthiness, you’re missing the bigger picture.  

What’s the difference between your credit score and creditworthiness?

Creditworthiness is essentially how “worthy” a lender thinks you are of receiving credit. If a lender has deemed you creditworthy, it means they see you as responsible and capable of repaying your debt. 

How does a lender decide if you’re creditworthy? They have two main considerations: your past experience repaying debt and your current ability to pay back new debt. Your past experience repaying debt is essentially your credit history. This is where your credit score comes in. 

Your credit score is determined by five factors:

  1. Payment history 

  2. Amount owed 

  3. Length of credit history 

  4. New credit 

  5. Credit mix

The lender’s other main consideration is your current ability to pay back new debt. They look at your debt-to-income (DTI) ratio to determine this. 

What is debt-to-income (DTI) ratio?

Simply put, your DTI ratio is the percentage of your monthly income that goes toward paying debt. This debt could include your monthly rent or mortgage payments, minimum monthly credit card payments, and any type of monthly loan payment. 

In order for a lender to feel comfortable with your ability to repay a new debt, they need to know you have the necessary income to do so. By understanding how much of your income goes toward paying debt right now, they can determine if you have enough left over to pay back the new debt. 

Although each lender sets their own acceptable DTI standards, a DTI below 20% is considered excellent and a DTI of 40% or more is typically deemed a sign of financial stress.

If you’re dealing with a heavy debt burden, your DTI ratio could be quite high. If so, it may be difficult for lenders to deem you worthy of additional debt, regardless of your credit score. This can be especially frustrating if you are trying to get a loan to pay off that debt. Even if you do qualify for a loan, a high DTI likely means you’ll only qualify for a higher interest rate. Plus, you still have to manage payments for many years while paying off the full balance of your new debt. 

What is debt settlement?

That’s why some people struggling with debt turn toward debt settlement. Debt settlement is the process of negotiating with your creditors to settle your debt for less than you owe. Since negotiating with creditors can be challenging without the right expertise, you can turn to a company that provides this solution, like Freedom Debt Relief. 

We help people who’ve experienced a financial hardship and are now having difficulty making payments on their unsecured debt. The first step in our debt settlement process is to voluntarily stop making payments toward your debt and instead start depositing funds that will be used to pay creditors for settlements we negotiate on your debts. The amount of money you need to deposit each month is customized to fit your budget, and is often much lower than your minimum payments to creditors. 

Being past due on your payments signals to the creditors that you’re experiencing a hardship, and can help convince them to accept a lower amount than you owe.

How does debt settlement affect your credit score?

When you stop making payments toward your debt, this will affect a key factor in your credit score: your payment history. As a result, your credit score will drop in the first few months of starting a debt settlement program. But the good news is that drop is only temporary. 

We conducted a four-year study with help from one of the three leading credit bureaus to find out exactly what happens to our clients’ scores as time goes on.* We found that after about six months in our program, your credit score can begin to improve. It’s around this time that settlements with your creditors start taking place, and your debt accounts are getting marked on your credit report as resolved. 

By the time Freedom Debt Relief clients graduated from our program, a majority of their credit scores had recovered to where they were at the start of the program. The study also showed that clients’ credit scores continued to improve more than two years after graduation. Not to mention, by the time clients graduate from the program, their enrolled debt has also been eliminated, which can mean a significant improvement to their DTI ratio.

FICO Recovery

How does debt settlement affect your creditworthiness?

Because debt settlement helps improve your DTI ratio, your overall creditworthiness will get a major boost as well. Remember, creditworthiness is determined by two factors: your past experience paying debt and your current ability to pay back new debt. In a debt settlement program like Freedom Debt Relief, we help you significantly decrease your debt burden, which will free up more of your income and improve your DTI ratio. 

An improved DTI ratio signals to lenders that you now have room in your budget to take on new debt, making you more creditworthy in their eyes. That means you can now get approved for the credit you need to buy a new car, make home improvements, or whatever else you’ve been waiting for.

In this chart, you can see that the average Freedom Debt Relief client begins the program with $28,000 of debt and a credit score of 650. Throughout the next 45 months, their score temporarily drops to 500 but then rebounds back to 650. In the meantime, their debt has been reduced to just $3,800. So while debt settlement does cause a temporary drop in your credit score, it also lowers your debt and improves your DTI, thereby helping improve your creditworthiness in the long run. 

FDR Grad Debt Burden
*The credit score (FICO®) impact is derived from a longitudinal study of Freedom Debt Relief clients between 2014 and 2018, which tracked FICO® scores, debt burden, and responsible credit behavior during that period of time. These findings have been validated by a credit reporting agency and confirm the impact and changes on consumers’ FICO® scores during and after the debt settlement program.

Debt settlement reduces debt and improves your creditworthiness 

If you’re struggling with debt, your DTI ratio may be too high to qualify for a loan. But fortunately, a loan isn’t your only option. In fact, it may not be the best option for you at all. With the Freedom Debt Relief debt settlement program, we can reduce your overall debt burden and help you put it in your past in as little as 24-48 months.* 

When you graduate from our program, you’ll be free of your enrolled debts, your credit score will be on the rise, and your overall creditworthiness will be stronger than ever. Call one of our Certified Debt Consultants at 800-910-0065 to get started.