David Stanger Shares How Credit Ratings are Affected by a Foreclosure
Foreclosure is the process whereby a homeowner loses their home due to a failure to make their mortgage payments. This is an unfortunate situation for all parties involved but if you think that foreclosure could be on the horizon, you should at least know what the consequences are.
One of the most dramatic consequences of foreclosure pertains to your credit rating. Unfortunately, lenders often report mortgage payment history to credit bureaus — The result of this is that your credit score is likely to drop if you default on payments and reach the point of foreclosure. He has extensive hands-on experience with complex real estate transactions and knows first-hand the dangers of foreclosure. Below, David Stanger outlines exactly how much you can expect your credit score to drop, as well as provides a few helpful tips to rebuild your credit rating after foreclosure.
A Drop in Your Credit Score
David Stanger of Westmarq claims that mortgage payments are typically reported to credit bureaus, which means a foreclosure will almost certainly result in a hit to your credit rating. However, lenders are not required to report on your mortgage to a credit bureau, so if they haven’t done so, there may be no change on your credit report. For most people though, your credit score will drop, the question is by how much and for how long.
FICO reports that if you have an average credit score of 680, a foreclosure is likely to reduce that score by 85 to 105 points. Alternatively, if you start with a high credit score of 780, your rating may drop as much as 160 points. Therefore, the higher your credit score, the harder you will be hit. In terms of time, most people who have experienced foreclosure will see the effects of it on their credit score for between seven and ten years. Until that point, it may be quite difficult to obtain a loan for a house and even afterwards, you may be required to provide ample proof that you won’t default on a mortgage payment again.
Tips to Improve Your Credit Score After Foreclosure
- Use your credit cards regularly. David Stanger asserts that losing access to all credit after foreclosure is a myth. Some credit card companies may choose to close your account, but it’s not a guarantee. For any credit cards you still have after foreclosure, use them as often as possible. Take full advantage of your existing lines of credit in order to improve your credit score. If you’ve been using a credit card consistently after foreclosure, and your bank suddenly tries to cancel it or raise the interest on it, call and appeal to them directly. Explain your situation and state your case, which ultimately comes down to the fact that you have been paying off your credit card on time every month and you will continue to do so.
- Consider a secured credit card. Secured credit cards are becoming increasingly common and may be a great asset if you’re looking to rebuild your credit after foreclosure, shares David Stanger. Most people can obtain a secured credit card regardless of their credit score as these cards require members to maintain a certain amount of money in the bank as a form of deposit. Using your secured card and making payments on time is one way to improve your credit score, as your payment history is reported to Equifax, Experian, and Transunion. However, David Stanger does warn that the key to secured credit cards is shopping around. Some have lots of fees, so be sure to do your research in order to find the one with the lowest fees.
- Stay up-to-date on all other monthly payments. According to David Stanger, late payments of any kind are extremely detrimental to your credit score. Therefore, it’s imperative that you stay up-to-date on all other monthly payments, especially debt payments or payments for a line of credit. In addition, don’t fall behind on smaller payments either, such as cable, internet, utilities, or mobile phone bills. These companies will report if you’re late making a payment, which will lower your credit score even further. Finally, credit ratings are improved not only by making payments over the long-term, but also by making payments on different kinds of debt. That is why it is essential to keep up with all types of payments, from personal lines of credit to car loans.
- Be patient. Unfortunately, the process of improving a credit score takes time. The key is to have patience. Do everything in your power to build your credit rating and track your credit score on a regular basis. David Stanger recommends waiting until your credit score is back at a decent level before applying for a new credit card.