Having a home foreclosed can be the biggest financial setback for many people but it doesn't mean it is the end of your financial future. A foreclosure may negatively impact your ability to qualify for a new mortgage, finance a car or get new credit but you do have options to improve your credit score.
A home foreclosure happens because you've stopped making payments on your mortgage and the financing company has foreclosed on the home as collateral for the outstanding debt. People who face financial hardships such as lost wages, unemployment or medical conditions may become unable to repay the debt.
A foreclosure is a serious blemish on your credit report and will impact your credit score. It remains on your credit report for seven years. A foreclosure can prevent you from obtaining new credit in the future but some lenders may still extend credit to you but with higher interest rates and less than preferable term.
There are ways to improve your credit after a foreclosure but it takes some time and effort.
- Make on-time payments to your other creditors. On-time payments are a big factor in calculating your credit score. Thirty-five (35%) percent of your credit score is based on your payment history and consistently making on-time payments improves your credit score. It will take time to rebuild your credit after a foreclosure but by having on-time payments on other debts will strengthen your credit score and restore confidence from creditors.
- Get a secured credit card. A foreclosure is an indicator by many creditors that may disqualify you for new credit. If you don't have any open credit to make on-time payments on, it will be difficult to improve your credit score. The answer is to open a secured credit card from a bank or credit union. You'll need to deposit money into a savings account to secure the credit line. The deposit used to secure your credit card will not be accessible to you. A secured credit card may require as little as a $100 deposit for a $100 limit. When you use your secured credit card, make sure to pay the card in full each and every month. As a precaution, stay away from financing companies or lenders who charge high fees and interest rates. Stick with a well-known bank or find a credit union to get your secured credit card or personal loan.
- Get a secured personal loan. Your credit score looks at the types of credit you have reported on your credit report. By increasing the mix of credit reported from credit cards to fixed installment loans can improve your credit score. Many banks and credit unions offer a secured personal loan. Similar to a secured credit card, you are required to place a deposit into a savings account for an amount equal or greater than your credit limit. When you get a secured personal loan, the bank or credit union will deposit or give you a check for the amount of the loan. The secured personal loan will have an interest rate and repayment term. For example, a $250 secured personal loan may require a $250 security deposit. The interest rate may be 6% with a 12 month repayment schedule. This means you'll pay interest and after 12 payments the loan is paid in full. After the loan is paid in full, your security deposit is released and accessible for withdrawal by you.
- Pay off outstanding debts. Prioritize debt repayment by making additional payments on any outstanding debt. By following the 3 year repayment plan found in your credit card statements as opposed to the minimum monthly payment can save you thousands of dollars. Use additional funds to pay off your car loan, student loans and other debts. Find ways to increase your income through side hustles or work-from-home opportunities. There are many services that allow you to earn income with your talents or simply offer services to family and friends for a fee. Don't be afraid to share with them why you are seeking extra income.
- Settle and pay off collection accounts. Many people who've faced foreclosure may also have collection accounts on their credit reports. Call the collection agencies and pay or settle your debt and ask for a “pay for delete.” Make sure you keep good records of the days, time and people you've spoken with and details of the conversation. This will help you dispute inaccurate information on your credit report directly with the credit bureaus.