Rebuilding Credit After Foreclosure
The following post is by Kevin from CreditShout, a personal finance site dedicated to helping people save money with credit cards.
Foreclosure is devastating not just because of the loss of your house, but also because of the damage to your credit. AS such, just like you would after a bankruptcy, you need to rebuild your credit after foreclosure. In fact, in many ways, foreclosure is very similar to bankruptcy as both stay on your credit report for up to 10 years and drag your FICO score down during this time period.
How to Rebuild Credit
The only real way to rebuild credit is with time. If you already have a credit card or other types of debts, you are well on your way towards rebuilding credit. The key is simply to pay each and every one of your debts on time every time. Over time, these creditors will report your on time payments, boosting the payment history section of your credit report. The payment history section accounts for 35 percent of your score, so this component is essential to rebuilding credit. If you use a cash back credit card or gas credit card, never ever carry a balance – the amount you end up paying in interest will essentially nullify any rewards that you earn.
Paying down debts can also dramatically raise your credit score, as your debt-to-credit utilization (or the amount of available credit you have actually used) makes up 30 percent of your score. It is likely you probably racked up significant debt in the months leading up to your foreclosure while you tried to make your house payments. Be aggressive about paying this down and get your balances to 30 percent or less of your available credit.
Secured Cards
If you do not have a credit card or other debts, you need to get one. With the foreclosure on your record, a secured credit card may be your only option. This is a card wherein you put down collateral in the form of a cash deposit. Your credit line is usually equal to the amount of cash that you used to guarantee the card.
Secured credit cards charge fees and have a high interest rate, so don’t carry a balance- instead, make sure the card holder reports to the three major credit bureaus and begin making small purchases that you pay off in full each month. Slowly, this will allow you to build up a record of on time payments.
Other Bills
It is also essential to pay any and all other bills on time. Paying your rent is crucial, but also think of utility bills, cell phone bills and other such related items. It may be hard for you to find a landlord who is willing to rent to you with the foreclosure on your record, and you may also have to put down larger deposits with utility companies. As such, building up a cash cushion to pre-pay rent and put down those deposits is important when you know you will be foreclosed on.
How Long Will it Take to Rebuild Your Credit?
Rebuilding credit is a slow process and there is no magic trick to getting things back on track. The more aggressively you pay down your debt and the more reliable you are with making payments on time, the faster your credit will begin to improve.
If you want to buy a new home, you may also wish to consider programs such as FHA or VA backed loans if you are eligible. Under FHA guidelines and rules, as long as your most recent foreclosure or bankruptcy is at least two years old, you may be eligible to qualify for a new mortgage. The interest rates for an FHA loan after foreclosure may be significantly less than going through a private lender. A larger down payment will help here as well, as it can make you a better bet as a borrower if you put down more cash.
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