Life After Foreclosure: How to Rebuild Your Credit

Foreclosure is a huge black mark on your credit score, but you can recover from foreclosure with discipline and dedication to your financial health. Foreclosure is one of the most detrimental notices on your credit report due to the size of the average mortgage loan. When you default on a personal loan for $3,000, the lender suffers little. When you default on a mortgage, the lender suffers tremendously. However, following simple steps to recover slowly over time will put you back in the good graces of the credit reporting companies.

Settle Outstanding Debts First

The first step to recovering from foreclosure is to settle any remaining debts you may have. Gather any attorney fees, credit card debt or other loans you still owe. Rank these payments according to their interest rates. Start paying off the most expensive loans, those with the highest interest rates, first. Do not neglect minimum monthly payments on your other loans, but do not aggressively seek to pay down the balance until your expensive loans are paid off. 

Determine Your Budget

Once your loans are paid off, start a monthly budget moving forward. Determine how much you can afford to spend each month after you have paid all bills and necessities. Once you have determined your budget, commit it to writing. Experts recommend that written budgets have a higher chance of success than either electronic or mental budgets. Once you have committed to the budget, do not stray from it for any reason short of an emergency.

Seek High-Risk Loans within Your Budget

You need to start flexing your credit in order to repair your FICO score, but you will be a high-risk borrower. This means your credit cards will have low limits and high interest rates. This is okay for the time being; use the credit anyway within your budget. Pay down balances each month. Seek a high-risk personal loan in order to make a few purchases. These loans are expensive but are a fast way to repair your credit if you pay them off on time.

Make All Payments According to Schedule

The single most important thing to keep in mind when you start using your credit again is: every single bill is important. Whether you have a medical bill or a $5 late fee on a movie rental, you need to pay the bill on schedule. Once you have made all payments on schedule for at least two years, you will see significant growth in your credit score. Continue to take small loans or increase your credit card limits slightly as you make your payments. 

Monitor Your Credit

Truly rebuilding your credit after foreclosure can take years. During those years, it is important to monitor how you are doing along the way. Using a service to monitor your credit will reward your positive behavior with real-time results. You will also benefit by protecting yourself from identity fraud or misreporting. Any time you see a charge or late payment that you do not think is correct, act immediately to rectify the situation.