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Repairing your credit score after foreclosure

Posted by  on Oct 05, 2011
 

If your credit score has nosedived as a result of a foreclosure, you're not alone.

There have been 9.3 million foreclosure filings in the U.S. since 2007, and a record number of foreclosures are expected in 2011, according to RealtyTrac, which tracks foreclosure activity.

In May 2011, there were 214,927 foreclosure filings nationwide--including default notices, scheduled auctions and bank repossessions by mortgage lenders. That means one of out every 605 homes in America received a foreclosure filing during the month of May.

For many former homeowners trying to recover from losing their homes, a big worry is how to repair their credit score.

How much will it hurt?

The impact that foreclosure has on your credit score depends on your credit standing before you lost your home. In general, people with higher credit scores tend to see the greatest impact following a foreclosure.

FICO scores range from 300 points to 850 points. Research from FICO indicates that a foreclosure can shave as many as 160 points, or as few as 85 points, off your credit score.

Here are three examples, based on different scores:

  • A person with excellent credit (780 score) would likely have a credit score in the 620 to 640-point range after a foreclosure.
  • An individual with good credit (720 credit score) would likely have a credit score of 570 to 590 following a foreclosure.
  • A consumer with fair credit (a 680 credit score) would likely have a score between 575 and 595 in the wake of a foreclosure.

Fortunately, although a foreclosure can wreak short-term havoc on your credit score, you can repair it. Also, even though a foreclosure stays on your credit report for up to seven years, you won't have to wait that long to restore your credit score.

"After someone goes through a short sale or a foreclosure, they may feel guilty or upset about it, but I tell them: 'Now is day one. So what are you going to do to improve things from here?'" says
Chris Bridges, the author of the free e-book "Your First Step to Credit Restoration, and owner of Vision Credit Services in the Washington, D.C. area. So now is your day one. Here are several strategies to help you boost your credit score after a foreclosure, and quickly get back in the good graces of mortgage lenders too.

Avoid credit temptation

For those who've gone through foreclosure, financial expert James Feazell has some blunt advice: "Stay away from credit cards." Feazell is vice president of education for the National Foundation for Debt Management, a non-profit credit counseling firm in Clearwater, Fla., that helps people recover from credit and debt problems.

One easy way to lay off the credit cards, Feazell suggests, is to "use debit cards with Visa and MasterCard logos," to prevent yourself from getting into credit card debt. This is practical wisdom since having big credit card balances lowers your credit scores. Under the FICO credit-scoring model 30 percent of your credit score is based on the amount of credit card debt you carry.

Two other ways to avoid racking up debt: Just say "no" to department store credit card offers. Applying for a department store credit card generates a hard "inquiry" on your credit report, which can lower your credit score.

Also, remove your name from the telemarketing lists used to pitch you new credit. To put an end to unsolicited credit card offers in your mailbox, simply call 888-5-OPT-OUT or go online to www.optoutprescreen.com.

One credit card that might be useful - and won't get you into more debt - is a secured credit card. You put up $300 - the security - and you get a credit line of $300. Ask the issuer which credit reporting agencies they report to before you get the card so that your good payment history is being recorded. Be sure you are not getting a subprime credit card that comes with many fees and upfront charges.

Piggyback on someone else's credit

Another way to build your good credit again is with a little help from your friends. If you have a spouse, parent, or another trusted family member or friend with good credit, have them add you as an authorized user to their credit accounts. This technique is known as "piggybacking," and it can help you get positive data added to your credit files without actually taking on new debt.

Check your credit report

A strategy Bridges recommends is to add positive information to your credit files to offset negative information. This is particularly useful after bankruptcy and effective following foreclosures, too. You should scrutinize your credit report and make sure it's not missing key information--such as old car loans or student loans you've successfully paid in full. You are entitled to a free credit report from each of the credit reporting agencies each year. Go to annualcreditreport.com to request a different one every four months so you can monitor your credit report throughout the year.

While a foreclosure can damage your credit score and your potential to get a loan in the future, it's not the end of the world, and your credit score can work its way back up if you follow this advice.

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