While you may be looking for a magical formula to fix your credit after a foreclosure, the hard reality is that it takes time.
A foreclosure or bankruptcy is the worst predicament a homeowner has to go through financially. After the 2007-08 housing crisis, millions of homeowners found themselves underwater. While the market has improved, people are still losing homes to foreclosure. A foreclosure stays on your credit report for up to seven years. You will find it difficult to take out a new loan, whether you want to buy a car or a new house. It lands homeowners in a more distressed situation than what they are already in after foreclosure.
But the fact that the battle is a long one doesn’t mean you should give up. Keep in mind if you don’t start working on your credit immediately after foreclosure, things can take a turn for the worse. It can actually render you unable to take out a loan for more than seven years.
To the contrary, if you play your cards right, you will see your score inch up after only a few months.
Here are a few tips for you to consider if you want to fix your credit after foreclosure:
Understand what credit score it and how it affects your financially
It is quite surprising, but true that most homeowners don’t have a clue what their credit score is and how it affects them financially.
First time homeowners check their credit score is when they apply for a loan. If you have gone through a foreclosure, you should check how severely it has affected your credit report. You should immediately request free credit reports from all main credit rating companies. It will help you know where you stand and chalk out a personalized strategy to fix credit after foreclosure.
Tap into your existing line of credit
Do you have a credit card? If the answer is yes, don’t think of getting rid of it.
A credit card can help you rebuild your credit score faster if you stay current on payments.
In some cases, card issuers can take certain steps in order to limit credit or close the card altogether if they come to know about a foreclosure. They can also raise your interest rate. If you receive a communication from them in this regard, you should act immediately and explain your situation. By directly communicating with them, you can avoid your card being closed or paying a higher interest rate.
The same goes true for an existing car loan or other types of loans. Make sure that you pay loan installments on time. It will help you rebuild your credit score faster.
Secured credit cards
While you may find it tough to get a regular credit card after foreclosure, you can always apply for a secured credit card, the latest buzz in the financial industry. Almost every lender now offers secured credit cards to people struggling financially.
Secured credit cards are easy to get simply because they don’t pose any risk to the lender. If you apply for a card with a credit limit of $500, you will normally have to keep the same amount of money in a bank account until the card closes. Your card issuer will have access to this money and forfeit it in case you default.
While there are many secured credit card issuers out there, shop around before choosing one. You wouldn’t want to end up paying hidden charges or comparatively higher interest rates.
Use secured credit cards very responsibly because they can be a great tool to build credit after foreclosure.
Join a credit union
There are all types of credit unions you can join depending on your employment history and background. Most credit unions operate locally, so check out which one you can join in your area.
When you join a credit union, you will have to open a checking or saving account with them. You will build your financial history with each transaction you make through this account, and it becomes the basis for applying for a loan in the future.
Credit unions often give weightage to your financial history with them, rather than your financial history with other banking institutions. As a result, they will tend to ignore a foreclosure or poor credit score on your report when considering your loan application.
Credit unions may charge a higher interest rate due to the risks involved in approving a loan to high-risk applicants, but the fact that at least they will consider your application makes them a great option to build your credit score after foreclosure.
Pay your bills on time
Most homeowners are unaware of the fact that falling behind on utility bill payments can hurt their chances of rebuilding credit after foreclosure.
Utility companies actually report late payments to credit companies, and it may be factored into your credit history.
The same goes true for other types of payments such as gym memberships, and cell phone and internet services.
The irony is that when you stay current on these payments, nobody bothers to report it to credit companies, but if you are late, you will get reported.
Don’t apply for more loans without checking your credit score
You should keep a hawk eye on your credit score after foreclosure. Request credit reports periodically and find out how much progress you have made. Don’t apply for a new credit card unless you have reached a satisfactory level. If you apply for too many loans, lenders will consider you desperate, still in a difficult financial situation. It will have an adverse impact on the prospects of your loan application’s approval.
If you have read this article attentively, one thing must be clear: you shouldn’t make the same mistakes that caused foreclosure in the first place. Instead of feeling defeated, you should sit down and evaluate your situation. It will help you come up with a strategy. Taking tiny steps towards rebuilding your credit score such as paying your utility bills on time is imperative.