How Foreclosure Affects Your Credit
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Facing a foreclosure can leave you with many questions, such as "Am I going to lose my home?" or "If my home is foreclosed, what will happen to my credit?" These are legitimate questions that deserve legitimate answers. Foreclosure isn't the end of your financial story; after foreclosure, you will still face financial decisions every day. For now, though, you need to understand the positive and negative aspects of home foreclosure.
Lower credit scores can influence your financial situation in a variety of ways. If you have a bad credit rating, you may be denied credit cards, car loans, and end up paying more interest on loans than you would if your score was higher.
It is important to keep these things in mind regarding credit scores:
- According to Fico Inc., more than 43 million Americans have credit scores that are less than 599.
- A score that equals less than 600 is low, and lenders will be wary of giving loans to borrowers with credit ratings below 600.
- Purchasing a home with a low credit score can easily cost you thousands of extra dollars in interest.
Foreclosure usually lowers a credit score between 200 and 300 points. If your credit rating is 700, and your home is foreclosed, you may end up with a credit rating as low as 400. 400 is relatively bad, considering that 340 is considered the worst possible score you can have, according to Fico. Although not all lenders determine their scores from Fico, they use similar means of calculating scores.
Rebuilding Your Credit After Foreclosure
Although your credit score is sure to suffer from a foreclosure, there is hope. You can begin to rebuild your credit score after you face a foreclosure. A foreclosure will be reflected on your credit score for seven years, but it won't influence lender's decisions about your credit forever - especially if it is an isolated, negative incident. As long as your score doesn't suffer any more setbacks after foreclosure, it will bounce back faster.
To keep your score from getting any lower after a foreclosure, and to help in improving more quickly, continue paying the minimum amount owed on your credit cards each month. Also, try to keep your credit card balances as low as possible - this may improve your credit rating as well. Although It may seem as though a foreclosure has completely ruined your credit rating, but your score will improve over time - just remember that reestablishing good credit takes a certain amount of time and discipline. If you are in the middle of a foreclosure, don't give up. Prioritize your spending and only buy what you need. Planning for the future, even if you are in financial distress right now, can help you regain a reputable credit score and peace of mind about your financial future.
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