Rebuilding your credit after a foreclosure

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Real Estate

5 steps to rebuilding your credit after a foreclosure

A foreclosure can have a significant negative impact on your credit scores, limit your ability to obtain new credit and remain on your credit report for seven years. However, with patience and a plan, you can successfully rebuild your credit so that you are in a position to take advantage of all that a healthy credit rating has to offer. Here are some key steps to take on the road to credit repair.

1/ Find out the true impact to your credit. First, be sure you know exactly how your credit was affected. The terms and conditions of foreclosure and short sale agreements can vary in how they impact your credit scores (how they are reported to the credit bureaus and how long they stay on your credit report).

2/ Get smart about your credit ratings. Educating yourself is your best line of defense when it comes to your credit, and a great place to start is with your credit report. You can obtain a free report from each of the three top reporting agencies (Experian, TransUnion and Equifax) by visiting, a site authorized by the federal government. Your credit report can give you insight into why your foreclosure happened so that you can take steps to prevent a re-occurrence (look in the "Public Information" section of your report). It's also a good idea to review your report to ensure it has no errors and that there are not any old debts still on record after being paid off.

3/ Pay your debts on time. Your goal is to create a positive payment history to show lenders you are being financially responsible. Additionally, paying down high balances can positively impact your credit score since your "credit utilization," or your debt-to-credit ratio, comprises 30% of your credit score.4/ Know what not to do. It may seem smart to close open credit accounts. That's not necessarily the case and could even hurt your score. Closing credit accounts, even those you have not used for some time, can suggest to lenders that you are closer to being "maxed out" on your credit than you truly are.

5/ Use credit cards to rebuild your credit. That may sound counter intuitive, but consistently paying off a balance each month has a positive impact on your score. If you're unable to obtain a regular credit card, you may want to consider a secured card, offered by many banks and credit unions. In simple terms, you'll be required to deposit a certain amount of funds with the creditor – and in return you'll receive a card for a line of credit in that amount. Using these secured credit cards responsibly over time can also accrue to your benefit and help rebuild your credit worthiness.

While repairing your credit can take time, it is an achievable goal. Be patient, develop a concrete plan and stick to it. The more disciplined you are, the more progress you can make.