Foreclosure can be the scarlet F, branding your credit report and docking up to 200 points off your credit score automatically.
But if you follow some simple tips, you can reestablish your credit and restore it to its former glory in a few short years. Here’s how:
Start slow. “What happens to people who’ve been in financial distress is that they just go in and do it [apply for more credit],†said Saundra Davis, a financial planner and management consultant in San Francisco. “You want to feel better, and it feels good to be able to walk in and sign your name on a new credit card. It’s an emotional boost, but you can’t let your emotions run away with you.†If you do, you may be digging yourself into a worse credit score.
Ten percent of your credit score is based on credit inquiries. Every time a company requests information on your credit, it dings your credit score. And if those credit companies reject your application, it’s even worse.
Go back to basics. Thirty-five percent of your credit score is based on how well you pay your remaining debts. And if you’ve been through foreclosure, it’s likely that you’re delinquent on other debts as well, says consultant Lathea Morris, co-founder of New Jersey-based The Credit Alternative.
So spend some time post-foreclosure getting your financial house in order.
–Track spending for 30 days.
–Figure out how much money you actually bring in.
–Save up to six months of income for an emergency fund. If you get behind, it won’t affect your ability to pay bills on time–and it won’t hurt your credit score.
“Once you build the family expenses around what’s actually coming into the house, you can focus on rebuilding your credit,†she said.
Avoid scams. As tempting as they are, steer
clear of rent-to-own outfits, Davis says. “Rent-to-own can sound like a good deal, but it’s just as bad as going to a payday lender and will probably land you in greater debt,†she says. “A lot of people who’ve been through foreclosure feel like they have to take whatever they can get. But just because you’ve been through foreclosure doesn’t mean you shouldn’t look for the best interest rates. Think about the true cost of what you’re paying for those things you get from a rent-to-own place.â€Choose credit wisely. Once you’re paying bills on time every month, start rebuilding by taking on two types debts you can afford:
–Revolving credit/credit cards: Consider a secured credit card. It’s a money loser in the short run. You’ll have to save $500 to secure the card and pay as much as $200 a year in fees. But you’ll get a credit card faster and, if you can afford it and pay on time every month, you may find the card rolled over into an unsecured credit card after a year. That’s better for your credit score.
–Installment credit/car or other loans: You probably won’t qualify for a home loan for at least three years, Morris says, but you can still look for other forms of installment loans. If you already have a car loan, concentrate on paying it on time every month.
If you don’t and want to reestablish your credit quickly, consider a secured loan, says Wayne Sanford, president of the New Start Financial Corp. in Allen, Texas. Here’s what you do: Borrow up to $1,000 total from family and friends for one week. Then ask your bank for a secured loan. Once you have the loan, repay your family and friends, and then pay that loan every month.
The key is that you know you can afford the monthly payments, Sanford says. There’s no point trying to reestablish your credit if you can’t pay on time and in full every month.
WEALTH FOR LIFE PRINCIPLES
1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy