In 2009, over 3 million homes were forced into foreclosure. High unemployment, adjustable rate mortgages, and tight credit came together to make it simply impossible for many American homeowners to continue making mortgage payments.
Foreclosure leaves a big black mark on your credit report, and can drop your credit score by up to 150 points, making it hard for you to get new credit in the future. And with foreclosure expected to keep rising through 2010, many people are facing the prospect of life – and building credit – after foreclosure. If you or someone you know is facing a foreclosure, know that there is hope. While it will take seven years for the foreclosure to completely drop off your credit report, you can still take steps today to improve your credit and raise your credit score.
Strategies for Improvement
- Choose future housing wisely: Wherever and whenever you find your new home, be honest with yourself about what is affordable – taking on too large of a housing payment ended in foreclosure. This time, limit housing payments to no more than 28% of your total income, and total housing and other debt payments to 36%. Set aside money for your housing payment before paying any other bills or making any other purchases. If at all possible, make future housing arrangements before foreclosure proceedings begin. This will make it easier for you to find someone willing to rent to you, without regards for the damage the foreclosure will do to your credit.
- Use existing credit wisely: Since it is unlikely that you will be able to get new credit immediately after a foreclosure, it is important that you are very smart with any existing credit. This means doing everything in your power to avoid other bad marks on your credit – stay current on all accounts that are reportable to credit bureaus, including credit cards, student loans, auto loans, housing payments, utility payments, medical payments, and even library accounts. If you have open revolving credit (credit cards), use it to the extent that you can pay the balance off in full each month – the point is to keep your accounts open and prove you can be responsible with credit, without going further into debt. This will improve your credit score.
- Pay down debt: If you have existing debt, paying it off will result in increases to your credit score. If your new housing is substantially cheaper than the mortgage you had to foreclose on, use any extra money to jump start your debt payments. Use the snowball method, avalanche method, or whatever other method you want – the point is to get a plan and stick to it. Every time you reduce a balance, your credit score will climb – and zero balances will reward you psychologically as well as on your credit report/score.
- Live within your means: Understand your income and expenses – then create a budget and stick to it. If your current expenses exceed your income, you need to spend less or earn more. Anything else will just create more financial problems, and thus more problems on your credit report. Living within your means will prevent you from acquiring any more debt and allow you to get back on track.
- Get help: If you feel in over your head even after getting rid of a mortgage payment, it may be time to get help from a professional. Check with your church or community center for any programs that will allow you to get financial counseling for free. Otherwise, check out non-profit organizations such as GreenPath or Consumer Credit Counseling Service. A personal credit counselor can help develop a personalized plan to get you back on track.
- Monitor your progress: Throughout the process of rebuilding your credit, use free methods to check your credit score and credit report every 6-12 months. This will allow you to watch as your efforts pay off in the form of a higher credit score – but also lets you check for and dispute mistakes, to improve your credit as quickly as possible.
- Wait: Unfortunately, the best way to repair your credit after a foreclosure is simply to let time pass – as you move further away from the foreclosure, it will have less of an impact on your credit score.
Rebuilding your credit after foreclosure can be a long and frustrating process, but it can be done. If you put your mind to creating and executing a plan, you can find relief in just a couple of years.