For many homeowners foreclosure is a reality, but it’s not the end of the world, or the end of your credit. A foreclosure will remain on your credit report for seven years and will impact your credit the most in the first few years. As the foreclosure gets older and you add more positive history to your credit report, your credit will improve.
There’s no magic formula to repairing your credit after a foreclosure. The more you make good decisions about using your credit, the better your credit will be.
Evaluate the cause of the foreclosure.
Solving a problem is easier when you know the cause of the problem. You’ll have an easier time repairing your credit post-foreclosure if you understand what caused you to foreclose. What could you have done something differently? Perhaps chosen a different mortgage? Managed your money better? Understanding why the foreclosure happened can help you prevent it from happening again.
Adjust your spending habits.
If you haven’t been budgeting your income, start now. Having a budget isn’t the chore many people think it is. When done right, a budget helps relieve financial stress because it helps you make decisions about spending your money. If you had a budget before the foreclsure, but didn’t stick to it, you can start over again. Don’t forget to add your “actual spending” to your budget at the end of the month. This way you can see where you’ve overspent and make the necessary spending adjustments.
Continue paying all your other bills on time.
Make sure to pay credit accounts that regularly are reported to the bureaus. This positive payment history will help “pad” your credit score, keeping a foreclosure from completely devastating your credit. Not only that, a creditor or lender who manually reviews your credit report will see that the mortgage was the only thing hurting your credit and could be more lenient with your application. Don’t neglect other expenses, because they could end up on your credit report as collection accounts if you leave them unpaid.
Work on paying off debt.
Having a high debt load will hurt your credit score, even if you’re paying your bills on time. Work on reducing your credit card balances to 30% of the credit limit or less. That means a $300 balance on a credit card with a limit of $3,000. Reducing your debt level will also decrease your debt-to-income ratio. If you get a mortgage in the future, a lower debt load will help you better handle your payments.
Get help if you need it.
If you’re having trouble making a budget and putting together a debt management plan, you can get professional help. A consumer credit counselor can work with you to figure out how to make the most of your income. They will also negotiate lower interest rates and monthly payments with your creditors so you can work on getting out of debt. Choose a credit counselor wisely. Beware of unscrupulous debt settlement companies who can do further damage to your credit.
Get and use a credit card.
If you don’t already have a credit card, apply for one, but only after you’ve evaluated and adjusted your spending habits. Resist the urge to get a credit card just to buy things you can’t afford. Instead, use a credit card to make small purchases then pay off the balance in full every month. This shows that you can properly manage credit – borrowing only what you can afford and paying it back in a timely manner.