Years ago I had a friend who, before I met him, had unexpectedly found himself out of work. He and his family lived in a small town, and he had difficulty finding employment in his career field. While he was out of work for 18 months, his wife was only able to find part-time employment. The end result was foreclosure on their home. He was eventually able to find a position in another state, and he, his wife, and their four children began the adventure of relocating to the town in which I lived. It was interesting to be a friend-observer as they dealt with the limits foreclosure put upon them financially. The first couple of years after foreclosure were difficult for the family, but thankfully, they had made wise decisions and had good financial practices prior to losing their home so the recovery was not as hard as it could have been. I learned quite a deal through watching and listening to my friend and his spouse.
As anyone knows, going through a foreclosure will cause your credit score to plunge drastically, and the foreclosure will remain on your credit report for seven years. With a low credit score, you will be regarded as a high credit risk, and therefore, if you are seeking to open new credit accounts, the interest rates will be quite high. This will especially be true immediately following the foreclosure. However, if you can practice good credit habits consistently, you can begin to rebuild your credit score and, with time, ease the impact of the foreclosure.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 aimed to give consumers some protection against unfair practices by credit card issuing companies. This means that your interest rates on already existing credit card debt should not increase because of your foreclosure. You may, however, experience higher rates on new debt. If so, there are steps you can take to lower those rates, but it may take time.
Interest rates are primarily based on your credit score and how great a risk you are perceived to be. After foreclosure, you will want to work hard on rebuilding your overall credit score but also work with individual card companies to maintain or establish good standing with them.
First, if your rates on new debt have have increased after foreclosure and you have had a history of on-time payments, especially if you typically pay more than the minimum payment, contact your credit card company and discuss the rate increase with them. Ask them to look at your payment history and, based on your good-standing with them, continue to keep your interest rate at the lower level. If the initial person with whom you speak does not give you a satisfactory answer, don’t be afraid to ask to speak with someone with more authority.
If you haven’t had a history of on-time payments, start today to establish one. Also, make a great effort to pay more than the minimum due each month. After six months of on-time payments, call the card company to negotiate your rate. Continue to build your good payment history and continue to make those calls to negotiate your rate every couple of months until you get the answer/rate you want. Not only will a good payment history and a history of making more than the minimum payment to your credit card company establish with that company that you know how to handle credit, it will help in rebuilding the score on your credit report.
Another practice to adhere to in this rebuilding time is to go without that which you cannot afford. If you are unable to pay off a new purchase by the end of the credit card cycle, do not charge it.
Work to make sure your credit card balance is well below your credit limit. Ideally, work to pay down your debt load to 30% or lower of your credit limit. If you have more than one card with an outstanding balance, do it for each card. You may have to focus on one card at a time. While you do, be sure you are making all the other card payments on time. When you have lowered your outstanding balance, it is another good time to call the card company and discuss your interest rate. Because paying down your outstanding balance lowers your debt to income ratio, there will also be a positive movement on your credit score.
It might be easy in a tough situation like foreclosure to give into some kind of initial panic and close all your credit card accounts. Doing so would not be wise. Foreclosure will, for a time, make obtaining new credit both difficult and expensive – because of the high interest rates. You have a much better chance of working for reasonable solutions or compromises with a company with whom you’ve had a history. Also, most people don’t realize that closing established credit card accounts can sometimes cause your credit score to drop slightly.
The above practices are pretty basic. It might take a time to see the results of these practices, but they are fundamental approaches to using credit and to recovering from a large economic setback such as a foreclosure. If you can hang in there through the initial tough period and be committed to making on-time payments, making more than the minimum payment, charging only what you can pay off at the end of the month, paying down your credit card balance to 30% of your credit limit, and calling your credit card company frequently to dialogue with them about your interest rates, not only will you be able to come to an agreement on an acceptable rate of interest, you will also be rebuilding a more positive credit score.
