Credit Score & Foreclosure
Losing your home to foreclosure is a traumatic event. But the effects of foreclosure can last far longer than the actual event itself. That's because homeowners who lose their residences to foreclosure will suffer serious damage to their credit scores. This is significant because lenders as of 2010, whether they are passing out mortgage or car loans, rely heavily on credit scores when determining to whom they will lend.
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The Points You Lose
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When lenders or credit card companies see a foreclosure on your credit report, they immediately tag you as a financial risk. The theory goes like this: You already defaulted on your home loan. What's to prevent you from doing the same on an auto loan, personal loan or credit card bill? Financial website Bankrate.com quoted one attorney in a recent story as saying that a foreclosure can drop a consumer's credit score by as many as 300 points. That's a significant drop.
How Long It Remains In Your History
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A foreclosure will remain on your credit report for seven years, according to myFICO.com, the credit-scoring site run by Fair Isaac, the company that invented the FICO credit score that lenders use to determine which borrowers are financial risks. This means that every time you apply for a loan in these seven years, lenders will see that you lost your home to foreclosure.
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Your Score Will Improve
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There is hope, though. According to Bankrate.com, your credit score can begin to rebound from a foreclosure as soon as two years after the event as long as you pay all your other bills on time. The key is to remember that a foreclosure is a one-time event. You can recover it from it by displaying to lenders that you have otherwise paid your bills on time.
Boosting Your Score After a Foreclosure
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You can help your score recover quickly by taking some simple steps. First, always pay all of your bills on time every month. By doing this, you are showing lenders that you are a responsible borrower, despite the foreclosure in your past. Next, pay down as much of your revolving credit card debt as possible. Lenders don't like to see a lot of this kind of debt. Finally, use your credit cards to purchase items that you know you can afford to pay in full when the bill comes due. Lenders like to see borrowers use their credit cards wisely.
The Importance of Good Credit
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High credit scores are more important than ever as of 2010. If your score is below 620, you'll struggle to qualify for loans from most traditional lenders. To qualify for the lowest interest rates, you'll have to work harder than ever. According to a story by CNNMoney, lenders now consider credit scores of 740 and above to be top-notch. Consumers used to only need a score of 720 or higher to qualify for the lowest interest rates.
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References
- Photo Credit house image by Svetlana Kashkina from Fotolia.com
