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How to Repair Your Credit Following Foreclosure

how-to-repair-your-credit-following-foreclosure

Over the past decade, millions of Americans lost their homes due to foreclosure after the devastating housing crisis hit the country back in 2008. Not only is losing a home to foreclosure emotionally distressing, it can also wreak havoc on your credit score. Taking a major ding on your credit rating can seriously hamper your ability to take out another mortgage, or any other type of loan for that matter. 

That said, it’s still possible to repair your credit score following a foreclosure if specific measures are taken. Here are some things you should commit to doing following foreclosure to bring your credit score up to par and be financially capable of attaining homeownership once again.

Start a Budget

There’s no better time to start budgeting your income than right now. While this task isn’t exactly the most appealing thing in the world, it’s essential to help you stay on top of your finances and spending habits, and even more critical when it comes to repairing your credit.

Done right, a workable budget can help you make sound decisions about how you spend your money. It’s important to ensure that you account for every penny spent, rather than just depend on your anticipated expenditures. Adding your actual spending dollars to your budget at the end of each month will provide you with a more accurate idea of how much money you’re actually spending every month, and make any necessary changes to stick within your budget.

Check Your Credit Report

You’re allowed to check your credit report for free once every 12 months from the three credit bureaus: Equifax, Experian, and TransUnion. Make sure you get a copy of this report to see if there are any errors on it that could actually be pulling down your score. If so, you have the right to dispute the errors found and have them rectified. Make sure that old debts that are seven years old or more have dropped off your report, as they could also pull down your score.

Keep Up-to-Date on Your Bill Payments

It’s absolutely critical that you continue to make your monthly payment obligations in full and on time every month after foreclosure. This will show creditors that you are responsible and financially capable of staying on top of your debt and are doing what you can to avoid falling behind on your bills again. Stability in bill payment is critical, and it will demonstrate to lenders that you have fully recovered from whatever situation led to the foreclosure and are now able to pay your bills responsibly.

This will allow you to positively impact your payment history and inch your credit score upwards. Any mortgage lenders who review your credit report will see that the only thing that negatively impacted your credit score was your mortgage, and as such, they may be more open to being more lenient with your home loan application.

Pay Down Your Debt

A high level of debt will compromise your credit score, regardless of whether or not you’re paying your bills on time each month. For instance, a credit card debt of $5,000 looks a lot worse to lenders compared to a credit card debt of $500, even if you are paying the minimum amount due every month. Do your best to lower your overall debt balances. The further down you can get them, the better.

Not only will this look more favorable to lenders, it will also reduce your debt-to-income ratio (DTI), which is a critical factor that lenders use to assess whether or not to approve you for a mortgage in the future.

Keep Using Your Credit Cards

Don’t cut up your credit cards after your foreclosure. Instead, not only should you keep them, you should continue using them and paying them down on time every month. This will show how capable you are of meeting your financial obligations and can help increase your credit score.

That said, it’s important to make sure that you keep your credit card balances under 30% of your credit limit. Under no circumstances should you max out on your credit limit, as this will weigh your credit score down, as mentioned earlier. In addition, make sure that you don’t have balances on more than one credit card.

If your foreclosure forced you to lose your credit card privileges and you’re unable to qualify for a traditional credit card just yet, consider obtaining a secured credit card with the bank and use it on a regular basis – paying it off on time every month, of course – to help repair your credit score.

Don’t Take Out Any Loans

The last thing you want to do soon after foreclosure is start taking out loans, if you’re even able to get approved for one. That includes any type of personal loan or auto loan. Taking on even more debt on credit after you’ve gone through foreclosure will not look favorably on the credit bureaus and can even hurt your credit rating even more. 

Seek Help From a Credit Counselor

If sticking to a budget and paying down your debt is hard for you to manage, consider enlisting the services of a consumer credit counselor. These professionals can help you work out a plan that you’re comfortable with. They’ll sit with you and help you determine the best way to allocate every dollar you make and can even help reduce the debt you owe your creditors and the interest rates that come along with them.

The Bottom Line

Foreclosure can leave a major blemish on your credit report for as long as seven years, which can make it nearly impossible to be approved for any type of loan during that time period. But as devastating as foreclosure is on your credit rating, it’s still possible to bring it back up to where it should be by implementing specific tactics and sticking to them. If you’ve been foreclosed on, it’s certainly feasible to rebuild your credit score, and sometimes even see it creep up after just a few months of hard work and commitment.