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Similar to medical debt and some bankruptcies, it takes seven years for foreclosures to disappear from your credit report.
The unfortunate news is that as long as the foreclosure is on your credit report, your credit score will be negatively affected. But the impact of foreclosure on your score depends on your prior credit status.
The golden rule of FICO, a data analytics company that creates credit scoring models, is that high credit scores are penalized more than lower credit scores. The higher your score was before the lockdown, the more your score will drop. FICO also states that the higher your score, the longer it takes for it to fully rebound from a reported seizure on your credit report. Higher credit scores generally take longer to achieve, and a large drop can set you back more than a drop in a lower credit score would.
Below, CNBC Select defines what foreclosure is and recommends what you can do to rebuild your credit if it ends up on your credit report.
What is foreclosure?
Foreclosure occurs when a lender decides to take possession of a borrower’s home because the borrower has not made the mortgage payments. This is commonly known as “defaulting on your mortgage”, and when this happens the lender must repossess the property to collect the money owed.
In this scenario, because the borrower has defaulted on the repayment of their loan, the lender may seize the borrower’s property as collateral for not meeting the repayment obligation.
Even if a foreclosure stays on your credit report for seven years, you don’t want to wait that long to start rebuilding from the damage.
Below we offer some tips and credit cards that can help you recover your credit score.
- Pay your bills on time: Payment history is most important factor in getting a good credit rating. The fact that you paid your past credit accounts on time accounts for 35% of your FICO score calculation. We always recommend paying off your balance in full so you don’t carry it over to the next month and accrue interest, but when money is tight you should always make at least the minimum payment.
- Keep your credit utilization rate low: Your credit utilization rate, or the amount of available credit you use, should not exceed 30% according to experts, or even 10% utilization for the best score. Lenders and issuers want to see that you’re not using your entire credit limit, so the higher your limit and the lower your balance, the better. This factor accounts for 30% of your FICO score calculation.
- Apply for a secure credit card: It may seem counterproductive, but one of the best ways to rebuild your credit score is to open new credit and use it by following the two guidelines above. Secured credit cards are easier to get and require an initial deposit (usually $200) which acts as your credit limit. Applicants for Capital One® Secured might even be able to do a lower bully and still earn the typical $200 credit limit. The various minimum security deposits for the Capital One Secured card are $49, $99 or $200 depending on your creditworthiness, all with a credit limit of $200. You can also increase your credit limit if you pay your first five monthly credit card bills on time.
And if you’re not interested in a secured credit card, but have an average credit score right now, the Capital One® Platinum credit card is the best way to rebuild your credit. It comes with no annual fee, no foreign transaction fees, and a free credit monitoring service, called Capital One® CreditWise.
If you were to go through a foreclosure because you were unable to pay your mortgage, know that your credit will not be tarnished forever. Foreclosures can stay on your credit report for seven years, but keeping payments on your other credit accounts for those seven years will help balance the negative entry. Make sure you pay your bills on time, in full, and consider applying for a credit card that can help you bounce back.
Capital One card information was independently collected by CNBC and was not reviewed or provided by the card issuer prior to publication.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.