Foreclosure rates more than quadrupled from 2005 to 2010 as the subprime mortgage crisis affected every neighborhood, suburb, and urban area in America. In 2010, the number of loans in foreclosure spiked at 4.6% according to the U.S. Census, as millions of homeowners across the country faced enormous levels of negative equity and higher mortgage payments due to adjustable-rate mortgages. For thousands of Americans who weren’t underwater in their homes, layoffs, high unemployment, and falling wages meant that their dream home was no longer affordable.
Besides the emotional stress of losing your house, a foreclosure is also one of the worst blemishes that a consumer can have on a credit report, and it can stay there for up to seven years. However, if you have been foreclosed on, it is possible to rebuild your credit score, and in some cases, you can see your score inch up after only a few months.
How Foreclosure Affects Your Credit Score
Because mortgages are considered one of the safest forms of credit, FICO scores weigh them more heavily than other kinds of credit, and late payments on a mortgage cause the most dramatic drops in a FICO score. In extreme cases, a 30-day delinquency can cause a borrower’s credit score to fall by more than 100 points. After 90 days, it can fall another 30 points, and when the foreclosure is eventually reported to the credit agency, the score can plummet by yet another 30 points.
Even homeowners with perfect FICO scores see that score slide past “fair” and into “poor” territory when they can no longer keep up with payments. When this happens, getting new lines of credit is extremely difficult – especially personal loans, credit cards, and department store cards.
While it is difficult to improve your score, it isn’t impossible, and it does get easier over time. A few simple steps and careful planning after a foreclosure can help that score creep back up into fair, good, and eventually excellent territory.
How to Improve Your Credit Score Post-Foreclosure
1. Keep Your Credit Cards and Use Them
Foreclosing homeowners often worry that a mortgage default means they lose access to all credit. While it is possible that some credit card issuers can and will close credit cards on a customer when they discover that he or she has defaulted on a home loan, it is not inevitable.
When facing a foreclosure, it is important to remember that this is not the end of your financial life, and you still have access to credit – although it is substantially harder to obtain and more expensive once you do get it, especially in the short term. Thus, your existing lines of credit are extremely valuable, so keep them and keep using them if you can.
If your card issuer threatens to close your account or raise your interest rate, call them and explain the situation. Say that you have been paying your bills with them on time and that you continue to do so. Negotiate to keep your current credit limit and your current interest rate. In many cases, credit issuers are happy to keep offering you credit as long as you make your payments on time.
2. Take Advantage of Secured Credit Cards
Many banks and credit card issuers have gotten into the secured credit card game. Though there is a lot of competition among secured card issuers, there are still plenty of cards that charge very high fees, including application fees, annual fees, and even billing fees. Therefore, it is crucial to shop around. A secured credit card with low fees can be a valuable asset to rebuilding credit.
Just about anyone, regardless of credit history, can get one of these. This is because card members have to deposit a certain amount of money with the card issuer, and that becomes the security on the credit card. For example, a secured credit card with a $200 limit usually requires the cardholder to keep $200 in a bank account that he or she cannot access until the credit card account is closed. This way, even if the cardholder defaults on the $200 debt, the card issuer doesn’t lose out on the principal.
While this is a zero-risk proposition for card issuers, it can be beneficial for you as well. Your payment history is reported to Equifax, Experian, and Transunion, so if you use the secured card and pay your debts on time, you build a good credit history that improves your credit score.
3. Consider Your Local Credit Union
Not only do credit unions offer lower rates on loans, mortgages, and credit cards, but they also tend to be more forgiving of past mistakes, and often take on higher-risk applicants. This is because credit unions only give credit cards to members. Therefore, they have a better sense of your cash flow and financial past, and may see you as a lower risk applicant than other lending institutions with which you don’t have any banking history.
To take advantage of credit unions, first join as a member and get a checking and savings account. After a few months, the credit union is likely to consider your income and outgoing history with the union more than it considers your FICO score and history with other financial institutions. You may wind up paying a higher interest rate because you are still considered an at-risk applicant, but at least you’ll have access to credit.
4. Stay Current on All Other Debt and Monthly Payments
Since late payments are the first thing to negatively impact your credit report, keeping current on all debt payments and maintaining a consistently positive payment history on all lines of credit is crucial to improve your score. The longer your payment history, the bigger impact it has on your credit score, and repaying debts over a long enough period of time eventually raises your credit rating to what it was before the foreclosure.
While credit scores are improved by making on-time payments over a long period of time, they can be further improved if those payments are made on a variety of debts, such as car loans, credit cards, and personal lines of credit. It’s also important to stay current on utilities bills and contracts for Internet, cell phone service, and gym memberships. While these companies do not report on-time payments to consumer credit reporting agencies, they do report late payments, which hurts your credit immediately.
5. Wait to Reapply for More Debt
By tracking your credit score and waiting until it has returned to a satisfactory level, you can maximize your chances of getting approved for a new credit card. Even with a foreclosure still noted on your credit report, you can obtain a credit card if your FICO score is high enough. While the foreclosure is certainly not a good thing, creditors can overlook it if they see other promising signs on a credit report. This has become especially true since 2008, when foreclosures became rather common.
There is a lot of stigma and guilt attached to foreclosure, but there doesn’t have to be. Millions of people have made the difficult decision to walk away from a home to avoid personal financial ruin. While a foreclosure may feel like the end of the world, you can overcome the setback. Careful planning can help you rebuild your credit history, as long as you understand the system and how you can benefit from it.
Have you faced foreclosure? How have you rebuilt your credit since then?