How a Foreclosure Impacts your Credit

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foreclosureWe monitor our credit scores with the same intensive purpose that we keep tabs on the performance of our favorite sports teams. Well, maybe that is a bit of a stretch. After all, the home team does not have as much on the line as your credit score has on the line. One minor financial blip can send your credit score spiraling and thus, diminish your financial standing.

If credit scores are such a finicky thing, then how does a foreclosure impact your credit?

The Impact of a Foreclosure on Credit Report

A foreclosure remains on a credit report for seven years. This makes it appear that you have to do hard financial time for seven years. The three major credit reporting agencies (Equifax, Experian, Trans Union) consider a foreclosure to be one of the most negative events on your financial resume. However, the impact of a foreclosure on a credit report decreases with each passing year.

It might seem you have reached the financial cliff, but the fact remains that you can turn the financial ship around in about two years. You have to remember that a foreclosure represents one negative line that appears on your credit report. If you meet your other credit obligations and the foreclosure on a credit report is your only negative financial record, then you can expect your FICO score to stabilize and eventually move back into credit friendly territory.

A Foreclosure Still Hurts

Make no mistake: Even if you take care of all of the other credit obligations, a foreclosure on a credit report creates a dramatically different financial circumstance for you and your family. According to FICO, if you have a credit score of 780, a foreclosure drops your credit score on average between 140 and 160 points. The impact of a foreclosure on a credit score of 680 shaves up to 105 points off your credit score.

Higher Interest Rates

A foreclosure that factors in the calculation of your credit score requires you to pony up more money for interest charges. From credit cards to car loans, you can expect lenders to charge you higher interest rates. An increase in interest rates cuts into how much credit you have to make purchases, especially for big ticket items such as appliances and automobiles.

Creditors Just Say No

The substantial drop in a credit score caused by a foreclosure can change your status from credit worthy to “We won’t touch you with a 10-foot pole.” This is especially true for big time lenders that extend credit for home and automobile purchases. Credit makes the financial world go around and a foreclosure can put a stop to your financial dreams.

What You Can Do To Get Back on Track

Many financial experts call it the end of the American dream. The national foreclosure rate approaches four percent, with another 12 percent of properties either delinquent or just entering the foreclosure process. Almost anything can trigger the financial meltdown that leads to a foreclosure. It is not as important to determine the cause of a foreclosure as much as it is to pick yourself off the ground and reestablish your credit.

Pay on Time

To prevent the major financial blemish on your record from turning into a major financial rash, you must fulfill all of your other credit obligations. Pay more than the minimum owed on a monthly credit card statement and never miss a car loan payment. Taking care of your other credit card obligations eventually mitigate the negative impact of a foreclosure on your credit.

Secured Credit Card

Secured credit cards require you to put down a deposit and the amount that you put down is all you have to use for credit. For example, if you obtain a secured credit card by submitting a $300 deposit, $300 is all you can borrow under the secured credit card agreement. After you meet your monthly payment obligations for a few months, the credit card company should increase your credit line, without you having to put more money down to secure the card. Secured credit cards represent an effective method for alleviating the financial sting of a foreclosure.

A foreclosure might appear to be the end of your financial world. You credit score sinks faster than an anchor at sea. As they say, time heals all wounds, and that applies to a foreclosure as well. If you take care of your other credit obligations, a foreclosure should be a thorn in your financial side only for seven years.

 

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