How to Rebuild Credit after a Foreclosure

Owning a home is a dream many people hope to accomplish in their life. Unfortunately, about 1 in every 200 homes is foreclosed on per year in the United States. If you are someone who has dealt with the difficulty of a foreclosure, it can be a devastating blow to your credit and it can leave you wondering if you’ll be able to ever own a home again. While a foreclosure will stay on your credit report for seven years, it is not the end of the world. There are many proactive steps you can take to improve your credit score after a foreclosure and start the journey of financial recovery.

Determine the Cause of the Foreclosure

Identifying how the foreclosure happened can help you fix the problem going forward. Evaluating your spending habits, mortgage terms and conditions and other financial factors can help you pinpoint where improvements need to be made. Some situations that can lead to foreclosure may be out of your control; for example, if you lost your job and were no longer receiving a steady income. But you can evaluate those situations and determine how to prepare yourself for unexpected future circumstances with something like an emergency fund.

Obtain Your Credit Report

It might seem like rubbing salt in the wounds, but there are other practical reasons for checking your credit score besides verifying that, yes, you’ve been through foreclosure. As mandated by the Fair Credit Reporting Act (FCRA), you can get a free copy of your credit report from each of the three reporting institutions every 12 months. This will give you an accurate picture of what your credit situation is following the foreclosure. While you won’t immediately be able to fix how the foreclosure is affecting your score, you’ll be able to see what other factors are impacting it so you can attempt to improve those areas.

If you have credit card accounts, many card issuers will give you access to your FICO credit score (or your score straight from the credit bureau) right on your online credit card portal. If your card issuer has a mobile app available for your cell phone, they may also provide your credit score on the app at no additional cost to you. Apps like CreditWise have a “credit simulation” option where you can determine what factors are affecting your credit. This feature also allows you to see how certain credit behaviors can positively or negatively impact your score. Factors such as credit utilization, how much you’ve used of your available lines of credit, and how often you have made on-time payments affect your credit the most, so being able to see exactly where you stand in these categories can help you figure out which steps you should take to rebuild your credit.

Pay Bills on Time

Making sure that all of your current accounts and bills get paid on time can have a positive impact on your credit score over time. Payment history counts for nearly 35 percent of your credit score, so paying each bill when it’s due can show lenders that you are reliable. This can be one of the easiest categories to remain consistent in as long as you keep track of your finances and establish a new budget.

Not only can paying accounts late have a negative impact on your score, it can also have a negative impact on your relationship with the credit card company. Typically, late payments are accompanied by a late fee, a higher interest rate and a report to the credit bureaus. It is important to check with your credit card companies on their late payment policy so you know exactly how that company handles late payments. Many issuers offer a grace period, which is a span of time after your due date where you can still pay and they will not report a late payment to the bureau. Even if you’re confident in your ability to pay on time, knowing what to expect in any situation can keep you in control of your accounts and help prevent negative reports on your credit.

Open a Secured Credit Card

It can be discouraging thinking about opening new credit accounts after a foreclosure because many people fear being declined by lenders. While this fear is valid, secured cards are a great option for people attempting to either establish or rebuild credit.

Secured credit cards require a security deposit upon opening that becomes your credit limit. For example, if you want to have a $100 credit line, you provide the lender with $100 that they will freeze within an account. As long as you stay current on payments, you will receive your $100 deposit back after closing the card.

However, because the lender has your security deposit, secured cards are somewhat easier to be approved for even if you have bad credit. The best part? Some secured cards don’t require a credit check, so you don’t have to worry about an additional inquiry or hit on your report.

Create a Budget and Pay off Debt

Credit utilization — how much of your available credit you are using — can greatly impact your credit score. The more you can lower this, the better! Experts suggest keeping your utilization below 30 percent — anything above that can negatively affect your score. Budgeting apps like Mint can help you keep track of your finances. Setting a strict budget for yourself allows you to find extra money outside of essentials like bills and living expenses to apply to debt accounts.

Creating a budget can also help you save more money for your next big purchase, like a new home when you’re ready, or assist in establishing an emergency fund for any unexpected expenditures. Staying on top of your finances so you don’t overspend can guide you to live within your means and hopefully avoid a foreclosure going forward.

While having your home foreclosed on can be devastating, it does not mean you’ll never own a home again. It is important to understand that you and your credit can recover from this. It won’t be an immediate recovery and it will require some patience, but with these tips, you can begin financial recovery and your journey to homeownership again.

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The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.