How You Can Repair Your Credit After a Foreclosure
Hundreds of thousands of property owners face foreclosure every year. In fact, while the hard numbers claim that foreclosures have decreased in recent years across the U.S., if you zoom in a bit you’ll see that many sectors of the market have actually seen an uptick in the total number of foreclosures.
If you’ve recently suffered from a foreclosure, you may be worried about your credit score taking a hit. While there is never a quick fix, here are a few tips and suggestions on how to manage the damage and repair your credit as quickly as possible.
Table of Contents
- 1 How Does Foreclosure Affect Your Credit?
- 2 How to Improve Your Credit Score After a Foreclosure
- 3 Tips to Avoid Future Foreclosures
How Does Foreclosure Affect Your Credit?
A foreclosure typically only takes place after you’ve missed at least four consecutive monthly payments, adding up to 120 days or more. Foreclosure can have a serious impact on your credit score, as a mortgage is considered one of the safest forms of debt you can own. On top of that, your ability to make payments on time accounts for as much as 35% of your credit score.
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The overall effect that a foreclosure could have on your score may vary depending on how high or low your score was in the first place. Typically credit scores are lumped into five categories:
- Poor credit score: below 579.
- Fair credit score: between 580 and 669.
- Good credit score: between 670 and 740.
- Very good credit score: between 740 and 799.
- Excellent credit score: above 800.
As a general rule of thumb, the higher your initial score, the farther it can fall.
A foreclosure doesn’t happen overnight, either. From the point where you begin to miss mortgage payments through the actual foreclosure process itself, a credit score may easily slip by 100 points and, at times, even more than 150 points. If your score drops significantly, it makes it difficult to do things like open up new lines of credit or apply for credit cards.
When Is a Foreclosure Removed From Your Credit Report?
A foreclosure typically takes seven years to be removed from a credit report. While a foreclosure on your credit report may feel set in stone, there are a few exceptions to this seven-year waiting period, such as if the lender dismisses the foreclosure or goes out of business.
Apart from rare events like these, it’s very difficult to remove a foreclosure from a credit report before the mandatory seven-year window is complete.
How to Improve Your Credit Score After a Foreclosure
While a foreclosure is detrimental to your credit score, it isn’t the end of your financial journey. There are still steps you can take to repair your credit score and even, in select cases, have a foreclosure removed from your score prematurely.
How to Get a Foreclosure Off Your Credit Report
As previously mentioned, a foreclosure remains on a credit report for seven years. If the foreclosure remains on your report for longer than that period of time, send a dispute letter to the credit bureaus to have it removed.
In addition, you may be able to get a foreclosure removed from your credit report if:
- You have a voluntary dismissal (in other words, the lender voluntarily releases the foreclosure from your record).
- The lender is no longer in business.
- There are not enough authentic records to back up the foreclosure.
In addition, if you’ve suffered from an unlawful foreclosure, you may challenge the legality of the foreclosure itself. In other words, if your bank has been lazy or skipped any steps in the complex foreclosure process, you may be able to find recourse.
If you suspect that you have a mistake on your credit report regarding your foreclosure, you can do the following to challenge it:
- Request a free copy of your credit report.
- Review the report to look for any errors.
- Contact Equifax, Experian, and TransUnion to dispute the error.
If your suspicions are correct, you may be able to get the foreclosure removed from your report before seven years have elapsed.
Use a Secured Credit Card
Apart from challenging the foreclosure itself, you can also work on building your credit score back up in several different ways. For instance, you could get a secured credit card, which requires a security deposit that is as large as your spending limit.
This will help you avoid building up new debt while simultaneously providing the credit-building effects of using a credit card and making payments on a regular basis.
Keep Your Accounts Current and Credit Utilization Rate Low
If you want to establish long-term financial health, it’s critical that you keep your existing accounts current as you recover from your foreclosure. Don’t add to your debt and actively work to pay down what you already owe.
In addition, strive to keep your credit utilization rate at or below 30% (25% is excellent). In other words, if you have a credit limit of $5,000, try not to ever borrow more than $1,250 at a time.
While these tips won’t have an immediate impact, they will have an important effect over time as you demonstrate sound financial judgment and your foreclosure fades into the past.
Tips to Avoid Future Foreclosures
Finally, make sure to set yourself up to avoid the fiasco of foreclosure in the future. You can take a couple of different steps to ensure that you avoid this scenario down the road.
Contact Your Lender
If you find that you are starting to struggle with mortgage payments once again, make sure to contact your lender early in the process. Maintaining an open line of communication can help to avoid the eventual need for foreclosure.
While you might need to eventually downsize or sell your house and move into an apartment, you may be able to do so by opting for a short sale instead of a full-blown foreclosure.
Prioritize Your Budget
Finally, if you feel a financial squeeze pressuring you to potentially miss those mortgage payments, it’s important to review your budget. Look for any expenses you can slash and then consider what other expenses you can strategically miss in order to avoid a late mortgage payment.
Remember, your mortgage is a cornerstone of your credit history, and it should never be under prioritized.
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