Foreclosure? How to Rebuild Your Credit

You've had a foreclosure or a short sale on your property. Now what? It's time to start rebuilding your credit.

"Though you may be relieved to have finally resolved your housing situation, don't put it out of your mind just yet." writes Stephanie Taylor Christensen on Mintlife. You need to follow through and know the terms of how your finances were resolved.

"When it comes to foreclosures and short sales, no two agreements are alike;" says Christensen, 'the terms and conditions have different impacts on credit scores, how they are reported to the credit bureaus, and how long they take to fall off."

A short sale, where the lender allows you to sell the house for less money than you owe and then may or may not forgive the rest, has always seemed to be the best of the options. However, a FICO study showed that there wasn't that much of a difference between the foreclosure and short sales regarding the end result to your credit score.

What did matter, interestingly enough, was your original score. Higher FICO scores showed the greatest impact and took longer to rebound.

"Time is critical in rebuilding credit worthiness: a short sale with no deficiency balance will generally require at least three years before the credit score will increase." writes Christensen. "In the case of a foreclosure, the borrower must wait for at least seven years, and in some cases, up to ten, if a bankruptcy filing was involved."

Credit cards will be the key to rebuilding your credit score. Start by requesting your credit report from a free credit reporting agency. You are allowed one free report each year. Check for errors and report them to the credit bureaus.

Start paying down your credit cards. Christensen reports that 30 percent of your FICO score is based on debt-to-income ratio. Set up automatic bill pay to avoid late or missed payments and "don't attempt to raise your credit score by closing open credit lines." advises Christensen. "Know that removing the credit availability might actually hurt your score more after a short-sale or foreclosure, when access to new credit will be limited. (To potential lenders, closing the credit, even if you haven't used it in years, makes it appear as though you are closer to being "maxed out" than you really are)."

No credit lines at all after the foreclosure? Apply for a secured credit card to rebuild your credit. A secured card requires you to deposit funds in the bank to "secure" your credit limit on the card. Your credit limit is based on the amount you deposit. Using this card responsibly will show the lender that eventually you will be a good candidate for unsecured credit again.

Christensen states that it will take patience and time to rebuild your credit. Most bad items will drop off your credit score in 7 years. "If you manage other accounts responsibly while you wait, you should be in good shape by the time the foreclosure disappears from your credit report."

Read the full story at MintLife.com

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