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Smart Credit Moves: Foreclosure, Bankruptcy Affect Credit Score Differently
09/18/2008 - By Lathea & Morlino Morris The damage to a credit score after a major negative entry like a foreclosure or bankruptcy is serious, but does not last forever. It's a common misconception that these negative entries will ruin your score for a very long time.
The damage to a credit score after a major negative entry like a foreclosure or bankruptcy is serious, but does not last forever. It's a common misconception that these negative entries will ruin your score for a very long time. Although Chapter 13 bankruptcy and a foreclosure will remain on a consumer credit report for seven years and Chapter 7 bankruptcy will remain on a report for 10 years, its impact to your FICO score will lessen over time. Negative account information reported on a credit report for the first 24 months has the most adverse affect on a credit score. The important thing to keep in mind is the damage to your FICO score will lessen and in fact improve if you do not default on any other credit obligations. You should begin to recover from these negative entries within a couple of years.
Many homeowners have asked us which causes the most damage – a foreclosure or bankruptcy? It depends. This is where things get dicey. While both a foreclosure and bankruptcy are considered very negative hits to your FICO score, a foreclosure can be isolated to a single account (your mortgage account). However, a foreclosure is very serious to mortgage lenders. They will look at a foreclosure more seriously than they will a bankruptcy that doesn't include a house. So a mortgage credit report that includes a foreclosure could have a more devastating impact on the credit score than one that includes a bankruptcy. Generally, a bankruptcy involves multiple delinquent accounts. For example, an account charged-off or in collections when you filed bankruptcy will be deleted seven years from the original delinquency date, so it may be deleted before the bankruptcy. An account that was current when you filed bankruptcy will remain on your credit report seven years from the date it was included in the bankruptcy. So a bankruptcy impact to a consumer credit score could be more devastating than a single foreclosure.
Rebuilding your credit and creating a financial management plan should be your focus whether you have had a home foreclosed or you have filed bankruptcy. Our seven tips:
1. Order your free annual credit reports from the three major credit bureaus, Experian, Equifax and Transunion. Go online to: www.annualcreditreport.com. Review your credit reports for errors. Make sure all accounts involved in a bankruptcy show this and $0 balances.
2. While you are rebuilding your credit, open a savings account to begin to build an emergency fund. Your goal should be to save a minimum of three months of living expenses.
3. Keep a daily record of all your spending. Create a monthly spending plan so you'll know how much is coming in and going out. You need to know how much you can comfortably afford to pay for purchases within your income.
4. Re-establish credit with a secured credit card, if you are unable to get a traditional credit card. To get a secured card, you will be required to make a deposit with the issuing bank. You will use the card as usual up to your credit limit, an amount equal to or slightly higher than your deposit, which normally ranges from $100 to $1000. This deposit reassures the bank of your willingness to honor your debt. If you do not pay back your debt, the bank may confiscate your deposit. Your account should earn interest while in the card issuer's bank. Make sure the issuing bank will report the account to the credit bureaus. After you prove a good payment history with the issuing bank, you may be able to switch to an unsecured card. For the best secured credit cards, go online to: www.cardtrak.com or www.bankrate.com. Or, find a credit card that matches your credit score at www.financeglobe.com
5. Limit your credit card spending to what you can pay back in a short period of time. Always pay your bills on time.
6. Maintain health and automobile insurance. Medical bills or a car accident can result in high bills and possibly lead to collection accounts reported on your credit report. Medical bills are one of the top reasons for filing bankruptcy.
7. When you can't make a monthly payment to a creditor, be proactive and call them. Try to work out a special payment arrangement. Your goal should be to keep the creditor from reporting any negative payment information to the credit bureaus.
Remember, re-establishing credit after a foreclosure or bankruptcy involves convincing lenders that your financial picture has changed and you now have your finances under control. Now, that's a smart credit move.
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