A foreclosure, short sale and/or bankruptcy will remain on your credit report for seven years, and most lenders will not offer you a mortgage for approximately one to three years. A good way to rebuild your credit is to have a few open credit accounts that are in good standing such as a vehicle loan and a couple credit cards with low balances that you pay on time every month, which should help you get your scores backup overtime.
Please keep in mind that you do not want to have too many open credit accounts or to max out your credit because this may hurt your scores in the long run. Items on your credit report such as “maxed-out” credit cards can take a heavy toll on your credit score. In fact, your total outstanding debt compared to credit, or credit utilization, accounts for approximately 1/3 of your credit rating.
To help recover from a a foreclosure, short sale and/or bankruptcy, you’ll also want to pay off any past due accounts as quick as possible. If you’re able to reduce your debt load to below the credit limit, your credit score will slowly, but surely begin recovering.
Creditors and lenders want to be sure that they can trust their borrowers to make their mortgage payments on time each and every month. After two to three years of making your payments on time, you may be able to receive a mortgage and other big ticket items again if that is your ultimate financial goal.
It’s important to realize that you can rebuild your credit and obtain a new home in the future if that is your goal. Establish short and long-term financial goals, and stay focused on the task ahead!
Here are some other things you can do to help fix your credit and get you back on track to financial success.
Correct Any Errors on Credit Report
Your credit report is your primary tool for monitoring your credit rating, and it’s recommended to examine the report frequently for possible errors or inconsistent reporting.
You can obtain a free copy of your credit report from all three credit reporting agencies. Each of the credit bureaus – Equifax, Experian, and TransUnion – (at request) is required by law to provide you with one free copy of your credit report every 12 months. You can do this by visiting this website, annualcreditreport.com, or by calling 1-877-322-8228.
If any errors or outdated information is found, you’ll need to contact the credit reporting agency and information provider (i.e. the company, person, or organization that reported the derogatory) to inform them of the errors. It does not costs anything to dispute such errors, however it may be in your best interest to first write a dispute letter to the owner of the debt.
Although the CRA may agree to remove an error from your credit profile, that will not stop the derogatory from reappearing on the next reporting cycle. It’s advisable to download and read the Fair Credit Reporting Act (FCRA) so you can cite the proper verbiage in your dispute. If the creditor refuses to correct the error, write a letter to the Federal Trade Commission (FTC), who is the regulatory body in charge of enforcing the FCRA.
Rebuild Your Credit Score Using Credit Cards
Obtain a new credit card, or use an existing account to help you get back on track. A secured or unsecured credit card is one of the most effective options to begin rebuilding your credit. Future creditors will need to ensure you’ve been responsible since the foreclosure before approving you for a new car or mortgage loan. Show discipline by using your credit card every month to make small purchases, and always pay off the balance in full.
Once you have your spending habits under control, consider obtaining multiple types of credit simultaneously, including installment credit and revolving credit. Installment credit generally consists of car loans, student loans, etc., while items such as credit cards are considered revolving credit.
If you are unable to obtain a regular credit card due to the foreclosure or another negative item on your credit, apply for a secured credit card. With a secured card, you may be required to make a deposit against the credit limit, which the bank will hold as collateral if you were unable to meet your obligations. This will allow you to prove you’ve been responsible with your spending habits, and if you are able to maintain your expenses for a couple of years, your bank may offer you transition to an unsecured credit account.
Apply at a credit union. Credit unions are typically more forgiving on their credit requirements and offer low interest rates on credit card accounts. So even with a past foreclosure, you may be able to secure a new loan or an unsecured credit card at a credit union.
Contact a Credit Counselor
One non-profit agency that we have found very reputable is Consumer Credit Counseling Services (CCCS). This agency does a great job helping consumers with their credit and debt problems. They will educate their clients as best as possible on how to manage their current obligations, while trying to fix past problems.
If the credit in question involves housing or real estate, try contacting the Department of Housing and Urban Development Counseling Office nearest you. You may be able to ask them for counseling in your other credit problems too. Contact a local community center, universities, military bases, or credit unions and inquire there. Either they can provide you with the counseling themselves or they may have ideas and where to get the free counseling that you need.
Contact a LoanSafe Mortgage Professional
If you need assistance obtaining a home loan or in rebuilding your credit, I would be happy to help you in any way I can. Please call me direct at 619-379-8999 or toll free at 1-800-779-4547.
I’m LoanSafe.org’s mortgage expert and a senior loan officer with Prime Lending. If you need a live rate quote, or need help getting a new mortgage, please call me direct anytime at 619-379-8999.