What to Do When a Foreclosure is Ruining Your Credit

What To Do When A Foreclosure Is Ruining Your Credit
Mike Randall
By: Mike Randall
Updated: December 6, 2016
Experts share their tips and advice on BadCredit.org, with the goal of helping subprime consumers. Our articles follow strict editorial guidelines.

A foreclosure is one of the most painful events that can happen to us financially. On top of the pain of losing your home, there is the damaging effect a foreclosure has on your credit.

Most of us work very hard to protect our good credit, and when we’ve reached the point where we can no longer keep up with our mortgage obligation, we know how badly it’s going to hurt our credit score.

According to Fair, Isaac and Company, the organization that created the FICO score, a drop of 300 points is not unusual following a foreclosure.

That means a good score can dip below 500 very quickly. And a foreclosure event stays on your credit record for up to seven years.

However, it’s also true our score may begin to go up again after only two years, if we maintain a good payment history following the foreclosure.

What to do when a foreclosure is hurting your credit.

Well, for one thing, a foreclosure will likely push your credit card interest rates to the highest bracket allowed — up to 32 percent in some cases.

The thing to do here is to stop using your credit cards immediately and pay them down as quickly as possible. However, you shouldn’t cancel the cards because having available credit counts in your favor when calculating your score.

The most important thing to remember when a foreclosure has hurt your credit is the damage is reversible.

“Look at your foreclosure as a necessary step

toward fixing your financial situation.”

Once your credit score has bottomed, the rating agencies will look for on-time payments beginning now. It’s up to you to keep a pristine payment record from this point onward.

Remember when I said your score can begin to improve within as little as two years? Well, this will only happen if you keep the remainder of your payments current.

Explaining your circumstances.

Another thing that can help get your credit score moving in the right direction again is to write a statement that will be permanently attached to your credit report.

By law, the rating agencies must allow consumers the opportunity to address any negative entries in their report by attaching a 100-word letter that explains the circumstances behind the default.

This letter will show the rating agencies and any lenders that, despite your financial hardships, you are taking control and responsibility for your debt obligations moving forward.

Going through a foreclosure is a very difficult and emotional experience. By taking a step back and realizing you still have options, it can be made easier.

Look at your foreclosure as a necessary step toward fixing your financial situation and getting your debts back to a manageable level.

Most of all, take the opportunity to restore your credit by building a good payment history starting now.

Photo source: washingtonindependent.com.