Losing your home is the worst part of going through a foreclosure, but there are other serious unintended financial consequences.
Your credit score may decline by 100 to 200 points as a result of a foreclosure, with the most of the harm occurring in the first two to three months following your initial mortgage delinquency. To make matters worse, the foreclosure may appear as a red flag to potential creditors on your credit record for a maximum of seven years.
Nevertheless, you don’t have to wait seven years to start repairing your credit. You may see that your credit score drops and then starts to rise again in a matter of months if you begin working as soon as the dust settles on your foreclosure. It’s possible that bigger advancements won’t be too far off.
Methods for Raising Your Credit Rating Following a Foreclosure
After you’ve been kicked out of your family home, repairing your credit might not be your first priority, but it does pay to start planning how you’ll do it as soon as feasible. An unbiased assessment of your credit’s current situation is the first step in the procedure, which is then followed by a detailed action plan to restore it.
1. Examine your credit report.
Get your credit report first, then carefully go over it. Checking your credit report on your own does not affect your credit score, in contrast to a lender’s credit check when you apply for a new loan or credit line.
As a matter of fact, you have legal rights to three complimentary credit reports annually, one from each of Experian, Equifax, and TransUnion. Make sure to review all three reports in the year of or right after your foreclosure, allowing a few months’ gap between each one.
Look for things that might be lowering your credit score when you study your credit report:
• Making mistakes in reporting. From time to time, lenders submit inaccurate account information to credit agencies. Certain errors, such paying on time but having your payment recorded as late, might have a negative impact on your credit. To start the process of fixing the problem, file a grievance with the agency.
• Unknown narratives. If any accounts appear that you do not recall applying for, they may have been opened by an identity thief. There is an emergency with credit here. To stop additional harm, you must lock your credit and then dispute the bogus account.
• Delinquent accounts and outstanding sums. Lastly, search for valid accounts that you may have forgotten about or that you may have fallen behind on for some other reason. Make it a priority to pay off these past-due amounts to lessen the negative impact on your credit.
2. Emphasize Ontime Payments
With your payment history making up 35% of the FICO and VantageScore calculations, it is the single most significant credit rating factor. Your primary focus for credit restoration should be on timely payments on your present accounts, along with paying off any past-due or delinquent obligations.
The benefits of timely credit payments won’t become apparent to you immediately. If you maintain your part of the agreement, consider them as a tailwind that gradually strengthens until it reaches a powerful gust of wind, increasing your credit score.
3. Create New Credit Accounts
You can have problems being approved for new credit on favorable terms in the months before and after your foreclosure sale and eviction. If your credit was excellent prior to the foreclosure, things can be worse because higher credit score holders typically experience a more severe blow from foreclosures and other significant credit occurrences.
Nevertheless, you’ll most likely be eligible for credit products meant for those with bad credit:
• Secured credit cards: these demand a down payment that the issuer may take if you don’t pay your payments.
• Credit-builder loans and credit cards, which are effectively loans made to you via a middleman who then reports the accounts to the credit agencies along with your payment history.
• Unsecured credit cards for people with poor credit, which usually feature high interest rates and low credit limits but don’t need a security deposit
Opening new credit accounts won’t immediately improve your credit score, just like making on-time payments will. In the short term, they might harm your credit, but not nearly as much as a foreclosure. But after you’ve demonstrated over several months that you’re utilizing them sensibly, that ought to alter.
4. Maintain Credit Usage Minimal
Credit utilization is another major credit rating factor. It makes up 30% of the formula for calculating your FICO score.
Your total monthly revolving credit payments divided by your entire revolving credit limit is your credit use ratio. Credit lines like credit cards and home equity lines of credit (which you won’t have access to during and after a foreclosure) are also known as revolving credit. If you pay off your credit card balances in full each month, this is advantageous because the computation considers your minimum needed payment rather than the actual amount you pay.
Lenders take notice of high credit use when it indicates that you are experiencing difficulties making ends meet with your salary. Applicants with credit usage percentages under 30%—that is, making no more than $1,500 in monthly payments on a $5,000 credit limit—are preferred by most lenders.
After a foreclosure, you can reduce your credit use ratio by applying for new credit accounts. But, applying for too many in a short amount of time will harm your credit score and your chances of getting approved for credit in the near future. Living within your means and not charging more than you can afford on your current credit cards should therefore be your top priorities.
5. Refrain from Making Many Account Applications
Applying for many new credit accounts looks like a quick approach to reduce your credit usage percentage, but it’s not always a good idea. The length of credit history and new credit are two associated credit rating elements that might be impacted by careless credit application. They make about 25% of your FICO score when added together.
Customers who can appropriately use their current credit are preferred by lenders over those who are solely concerned with getting approved for new credit. Applying for several bank accounts at once gives the impression to lenders that you either already have a spending problem or may eventually develop one.
Therefore, it should not be shocking that opening new credit accounts will lower your credit score briefly. Even if a decline doesn’t reach the severity of a foreclosure, it could lower your score enough to make it harder for you to get new credit with favorable terms. Even if a customer would ordinarily be eligible based only on their credit score, some credit card issuers, like Chase, would not open new accounts for them if they have applied for more than a specific number of credit cards in the recent past.
6. Vary Your Credit Combination
The many credit account kinds in your name are referred to as your credit mix. Lenders prefer to see a variety of installment and revolving accounts, not simply one or the other. Therefore, instead of applying for a secured credit card, think about applying for a credit-builder loan with regular monthly payments if you’re heavy on credit cards and light on installment loans following your foreclosure.
Although it only makes up 10% of your FICO score, your credit mix does matter. The tiresome process of opening new accounts following a foreclosure might be mitigated by having a varied mix of credit.
7. Eliminate All Outstanding Debts
Eliminating outstanding debt, particularly high-interest debt, benefits more than simply your household’s finances. Over time, it can assist in lowering your credit utilization ratio and raising your credit score.
A modified version of this nine-step method will help you swiftly reduce your debt load following a foreclosure and pay off credit card debt. Specifically, you ought to:
Find ways to increase your income, such as a new part-time job, side gig, or junk sale.
Apply a methodical approach to paying down high-interest, high-balance debts, such as the debt avalanche or debt snowball method.
Stop using your credit cards for non-emergency spending, unless it’s necessary to keep the accounts open.
Trim (or slash) your household expenses, focusing on unnecessary purchases you don’t really need to make.
Transfer existing high-interest balances to new accounts with 0% introductory APRs, which can greatly reduce your interest expense during the paydown period.
The idea of paying off your debt in full within a reasonable time frame can seem daunting, if not unattainable, if you are deeply in debt. This is particularly true following a foreclosure, which adds substantial out-of-pocket costs (such as moving expenses and a security deposit for a rental property) to the immediate harm to your credit and the psychological anguish of losing your home.
By using a tested strategy (avalanche or snowball), you may make the process easier to handle and recognize your progress along the way. As your debts decrease, you’ll have more money to apply to the remaining debts, which will create momentum.
To establish a debt management strategy, get in touch with a nonprofit credit counseling organization if you’re really overwhelmed at the beginning or run into difficulties along the road. Over a period of years, debt management plans may cost anything from a few hundred to a few thousand dollars, but it is a small amount to pay to break the cycle of debt and prevent bankruptcy.
8. Employ Resources for Conscientious Credit Monitoring
As you strive to get your credit back on track, pay careful attention to it. Utilize the three yearly credit reports to which you are legally entitled, but don’t stop there.
Begin by registering for the free credit monitoring and alert service offered by each credit reporting agency. Their attempts to upsell you on paid subscriptions will grow old fast, but as long as you check your credit reports on a regular basis, the free versions ought to be plenty.
Enroll in any credit monitoring or score updates that any of your credit cards may offer. They need to be free and might provide information that the credit bureaus’ programs don’t.
Making informed judgments about obtaining and utilizing credit is facilitated by having a clear understanding of your credit situation. For instance, you know that you should reduce your credit usage and pay off your current debt before registering for several new accounts at once if your credit utilization is much higher than 30%. Similarly, you know to look for reporting problems or unfamiliar accounts on your credit report if your FICO score suddenly declines without any apparent explanation.
Foreclosure is often associated with shame and remorse, but these things don’t have to be. And not all foreclosures are done so voluntarily. Millions of people have had to make the painful choice to leave a house in recent years in order to prevent further financial harm caused by exorbitant mortgage payments on properties that are worth less than the amount they owe the lender.