Rebuilding your credit after foreclosure

It takes time to rebuild your credit, but it can be done.

Even though foreclosure has serious negative impacts on your credit, you can rebuild your financial health over time. Credit scores are one of the components creditors use when evaluating a person’s credit-worthiness. The most commonly used credit scores are provided by the Fair Isaac Corporation and are known as FICO® scores. They range from 300 (the worst) to 850 (the best).

Every financial decision has a consequence. Late payments and nonpayment to any creditor will eventually be recorded on your credit report. This can lower your credit score, affecting your ability to get credit, increasing the interest rate you will pay for credit and even potentially affecting your ability to get a job. If you file Chapter 13 bankruptcy, you may find that you cannot make the payments to the court. This means you will have both a foreclosure and a bankruptcy on your credit report, truly hurting your credit score.

If foreclosure does occur, first focus on paying your existing debt to prevent legal action and collection agency involvement. Second, get a secured credit card and build perfect new credit. Secured cards require you to deposit funds with a financial institution in exchange for a credit card. For example, if you put $500 in, that will be the amount of your secured credit line. Then use it once a month (charge small amounts, such as $25, to help rebuild your credit) and paying the balance in full each month, on time, every time. This helps raise your FICO® score, especially after one to two years as FICO® focuses heavily on the most recent 12-24 months of payment activity. After six months of perfect payments, apply for a store credit card and use it in the same conservative way which will give you two positive credit lines. The National Foundation for Credit Counseling says that you need at least three lines of credit or your file will be considered too thin for the credit score to be evaluated.

It’s not a good strategy to attempt to raise your credit score by closing open credit lines. This might actually hurt your score more after a short-sale or foreclosure, when access to new credit will be limited. When you close credit lines potential lenders might think you have previously over-extended your credit. But if you are left with no credit lines after a foreclosure or short sale and cannot qualify for unsecured lines of credit, you can apply for a secured credit card.

Though a foreclosure will be listed on a credit report for seven years after the sheriff sale, taking charge of the rest of your credit life can reduce its impact. People always want to know how long it will take to rebuild their credit. Khurram Imam, Michigan State University Extension Program Instructor says, “More than one year, but less than five years, depending on how dedicated you are to rebuilding your credit.”

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