The worst part about foreclosure is losing your house, but the indirect financial fallout is pretty bad too.
A foreclosure can cause your credit score to drop by 100 to 200 points, with much of the damage coming in the first two or three months after you first fall behind on your mortgage. If that’s not bad enough, the foreclosure stays on your credit report for up to seven years as a flashing warning light to future creditors.
You don’t have to wait seven years to begin rebuilding your credit though. If you start working as soon as the dust settles on your foreclosure, you could see your score bottom out and begin creeping up again in just a few months. More significant improvements might not be much farther down the road.
Ways to Improve Your Credit Score After a Foreclosure
Repairing your credit might not be your top priority immediately after you’re evicted from your family home, but it pays to begin thinking about how you’ll do it as soon as possible. The process begins with an unsparing look at the state of your credit right now, followed by a step-by-step action plan to get it back on track.
1. Review Your Credit Report
First, pull your credit report and carefully review it. Unlike a lender’s credit check when you apply for a new loan or line of credit, checking your credit report yourself doesn’t lower your credit score.
In fact, you’re entitled by law to three free credit reports per year, one each from Experian, Equifax, and TransUnion. The year of or immediately following your foreclosure, be sure to check all three reports, with a few months’ spacing between them.
When reviewing your credit report, look for items that could be dragging down your credit score:
- Reporting errors. Lenders occasionally make mistakes when reporting account information to credit bureaus. Some such mistakes can negatively affect your credit, such as a payment reported late when you actually paid on time. File a dispute with the bureau to begin the process of correcting the issue.
- Unfamiliar accounts. If you see any accounts you don’t remember applying for, an identity thief could be the culprit. This qualifies as a credit emergency. You’ll need to lock your credit to prevent further damage, then dispute the fraudulent account.
- Unpaid balances and delinquent accounts. Finally, look for legitimate accounts that you’ve lost track of (or fallen behind on payments for another reason). Prioritize paying off these past-due balances to reduce the drag on your credit.
2. Focus on Timely Payments
Your payment history is the single most important credit scoring factor, accounting for 35% of the FICO and VantageScore calculation. Along with paying down late or delinquent debts, making timely payments on your current accounts should be your top credit-repair priority.
You won’t notice the impact of timely credit payments right away. Think of them as a tailwind for your credit score that builds slowly but eventually reaches gale force, propelling your score forward as long as you keep up your end of the bargain.
3. Establish New Credit Lines
In the months leading up to and following your eviction and foreclosure sale, you may have trouble qualifying for new credit on favorable terms. Things could be worse if your credit was in great shape before the foreclosure, as the hit from foreclosure (and other major credit events) tends to be more dramatic for people with higher credit scores.
Still, you’ll probably qualify credit products designed for people with impaired credit:
- Secured credit cards, which require an upfront deposit that the issuer can seize if you stop paying your bills
- Credit-builder credit cards and loans, which are essentially loans to yourself through an intermediary that reports the accounts and your payment history to the credit bureaus
- Unsecured credit cards for bad credit, which don’t require a security deposit but typically have low credit limits and high interest rates
Like timely payments, opening new credit accounts won’t boost your credit score right away. They could actually hurt your credit in the short term, though not by nearly as much as your foreclosure. But that should change once you’ve shown over a period of months that you’re using them responsibly.
4. Keep Credit Utilization Low
Credit utilization is another important credit scoring factor. It accounts for 30% of your FICO score calculation.
Your credit utilization ratio is your total monthly revolving credit payments divided by your total revolving credit limit. Revolving credit is another term for credit lines, such as credit cards and home equity lines of credit (which you won’t have access to during and after a foreclosure). The calculation uses your minimum required payment rather than the actual amount you pay, which is a good thing if you pay off your credit card balances in full each month.
High credit utilization is a sign to lenders that you’re having trouble paying your bills out of your current income. Most lenders like to see applicants’ credit utilization ratios under 30%: for example, no more than $1,500 in monthly payments on a total credit limit of $5,000.
Applying for new credit accounts can lower your credit utilization ratio after a foreclosure. However, applying for too many in a short period of time can have negative consequences for your credit score and your ability to qualify for credit in the near future. So your first priority should be living within your means and not spending more than you can afford on your existing credit cards.
5. Avoid Applying for Multiple Accounts
Applying for multiple new credit accounts seems like a quick way to reduce your credit utilization ratio, but it’s not always a good idea. Recklessly applying for new credit can affect two related credit scoring factors: new credit and length of credit history. Together, they account for 25% of your FICO score calculation.
Lenders prefer consumers who demonstrate that they can responsibly use existing credit, rather than those more focused on qualifying for new credit. Applying for multiple new accounts suggests to lenders that you have a spending problem or could develop one in the future.
So it shouldn’t come as a surprise that applying for new credit accounts can temporarily hurt your credit score. Any dip won’t be foreclosure-level severe, but it could knock your score enough to affect your ability to qualify for favorable terms on new credit accounts. Some credit card issuers, like Chase, simply won’t open new accounts for consumers who’ve applied for more than a certain number of credit cards in the recent past, even if they’d otherwise qualify based on their credit score alone.
6. Diversify Your Credit Mix
Your credit mix describes the different types of credit accounts in your name. Lenders want to see that you have a diverse mix of revolving and installment accounts, not just one or the other. So if you’re light on installment loans and heavy on credit cards after your foreclosure, consider applying for a credit-builder loan with regular monthly payments rather than a secured credit card.
Your credit mix only accounts for 10% of your FICO score, but every little bit helps. A diverse credit mix can counteract the drag of applying for new accounts after your foreclosure.
7. Pay Down Outstanding Debts
Paying down outstanding debt balances, especially high-interest ones, isn’t just good for your household budget. It can help lower your credit utilization ratio and boost your credit score over time.
To reduce your debt load quickly after a foreclosure, follow a modified version of this nine-step plan to get out of credit card debt quickly. In particular, you should:
- Stop using your credit cards for nonemergency spending, except as necessary to keep the accounts open
- Trim (or slash) your household expenses, focusing on unnecessary purchases you don’t really need to make
- If you qualify, transfer existing high-interest balances to new accounts with 0% introductory APRs, which can greatly reduce your interest expense during the paydown period
- Find ways to increase your income, like a new part-time job, side gig, or junk sale
- Take a methodical approach to paying down high-interest, high-balance debts, such as the debt avalanche or debt snowball method
- Put as much extra cash as possible toward your debts, including one-time windfalls like your annual tax refund
If you’re deep in debt, the prospect of paying everything off on any reasonable time horizon can feel overwhelming, even impossible. That’s even more true after a foreclosure, which piles significant out-of-pocket expenses (moving costs, a security deposit on a rental unit) on top of the direct credit damage and the emotional trauma of losing your house.
You can make the process more manageable by following proven method (avalanche or snowball) and celebrating milestones as you go. As your debts shrink, you’ll free up more cash to put toward the remaining debts, building momentum.
If you’re truly overwhelmed at the start or get stuck along the way, reach out to a nonprofit credit counseling agency to set up a debt management plan. Debt management plans can cost anywhere from a few hundred to a few thousand dollars over the course of several years, but that’s a small price to pay to end a vicious cycle of debt and avoid bankruptcy.
8. Use Tools for Responsible Credit Monitoring
Keep close tabs on your credit as you work to get it back on track. Take advantage of the three annual credit reports you’re entitled to by law, but don’t stop there.
Start by signing up for each credit reporting bureau’s free credit monitoring and alert service. You’ll get tired of their efforts to push you into paid subscriptions, but the free versions should be adequate as long as you periodically examine your actual credit reports.
If any of your credit cards offer credit monitoring or score updates, enroll in those as well. They should be free and may offer insights the credit bureaus’ programs miss.
Having a good sense of where your credit stands helps you make smarter decisions around applying for and using credit. For example, if your credit utilization is significantly above 30%, you know to trim your credit usage and pay down existing debt before applying for multiple new accounts at once. Likewise, if your FICO score drops suddenly for no apparent reason, you know to check your credit report for reporting errors or unfamiliar accounts.
There is a lot of stigma and guilt attached to foreclosure, but there doesn’t have to be. And foreclosure isn’t always involuntary. In recent years, millions of people have made the difficult decision to walk away from a home to avoid further financial damage from unaffordable mortgage payments on homes worth less than they owe to the lender.
However it happens, a foreclosure is certainly a serious setback, but one that you can overcome. Careful planning and execution can help you rebuild your credit history, as long as you understand the system and how you can benefit from it.