During the economic recession of 2007-09, the real estate market was deeply affected. In addition to many lenders suffering considerable losses, common consumers went through traumatic experiences such as bankruptcy and foreclosures. Tattered credit ratings and a hopeless financial conditions are definitely morally degrading, and one can also lose all hope of rebuilding the credit.
What is a Foreclosure
When a mortgage loan is availed by a consumer, in order to purchase real estate or a home, the purchased asset is pledged as a collateral of this loan. It means that in case of a default, as the right to lien is held by the mortgage lender, he can auction the real estate for loss recovery. This process is conducted by the lender in accordance with the court laws. In this situation, credit report, rating, and score, all drop down as a result of late and defaulted payments. The worst part is that the consumer is not able to borrow any kind of loan or use a credit card, for a very long period of time. Hence, it is essential to ensure that one rebuilds a damaged credit report as soon as possible.
The only thing one cannot repair in the credit report is the credit history, as it stays on it forever. In order to amend this situation, you may resort to the following steps.
1. Curb all unwanted interest rates. It so happens, that as a result of unsecured loans and credit cards, we end up paying a lot of interest to lenders, which is quite an unnecessary expenditure. Hence, all credit card services that you have been using can be stopped for the time being. This will drastically reduce your burden as you won't have to deal with payment dates and late fees.
2. Surrender all assets that are pledged as collateral, and get a certificate of a full and final loan payment. If you own more than one car and if one of them happens to be tied to an auto loan, then it would be wise to surrender such a car. After this step, you won't have to pay any installments and you won't have almost any liability on your balance sheet. If you have any shopping or grocery store card, then it would be wise to cancel them as well. Theoretically, you should be canceling any service that carries a 'service charge' or an interest. However, don't cancel medical services or insurance coverage.
3. All your financial affairs should be set up right. Hence, write down your salary, bank statements, and check your balances. Plan out your expenditures and open 3 saving accounts in three different banks. The first one would operate as a current account used for monthly expenditures. The second one will be for a sinking fund, and the third one will be for a permanent savings fund.
4. All canceled credit services means that your score and rating will no longer decrease, but remain stationary, and with gradual passage of time, will increase slowly. Once you have become sufficiently stable, you can take a slight risk and apply for a credit card, with the lowest possible limit. Next, apply for a debit card as well as a prepaid credit card. These will help you to increase your credit rating gradually and safely. While using them to preserve your rating, use the credit card for monthly expenditures like grocery. Use the debit card for gas filling, and the prepaid credit card for household bills. Remember to pay all card bills on time.
This is a risk free and easier way of rebuilding your credit after foreclosure.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.