Chapter 5: Credit
All of your credit activity is tracked by your credit report. It includes the payment history and balances owed on credit and store cards, personal loans, student loans, car loans, and mortgages as well as credit-related legal activity, such as foreclosures, repossessions, evictions, judgments, and bankruptcies. Your credit score is a numeric rating of the information in your credit report and is designed to measure the risk you won’t repay what you borrow. Having a good report and score makes it easier to obtain credit, rent an apartment, and even get low rates on insurance.
Experiencing a foreclosure severely damages your credit report and score. However, the damage does not have to be permanent – there are many things you can do to improve your report and score in the future:
Pay on time, every time
Do you have credit cards, car or student loans, or other debt? A commitment to always pay on time is one of the most powerful steps you can take to improve your credit rating.
Pay down your debt
Having a large debt load will lower your score. If you have balances on credit cards or loans, explore ways you can lower your interest rates and free up cash to make more than the minimum payments. Try to avoid charging more on your credit cards than you can pay off in full the next month.
Many credit reports contain mistakes. Perhaps someone else’s collection account appears on your report, or you were marked late on a credit card you always pay on time. That is why it is a good idea to periodically review your credit report from each of three credit bureaus: Equifax, Experian, and TransUnion. You can get a free copy of your credit report annually from the Annual Credit Report Request Service (www.annualcreditreport.com, 877-322-8228). If you see any errors, contact the relevant credit bureau and dispute them.
Most negative information, including a foreclosure, can stay on your credit report for seven years. The more recent the information, the more of an impact it has on your credit score, so over time, the foreclosure will become less significant.
In order to have a good credit score, you need to have some sort of credit and use it responsibly. If you have no credit now, you may want to apply for a credit card. For people with a low credit score, a secured credit card (which requires you to put down a deposit that the creditor gets to keep if you do not make payments) is generally easier to get than a regular credit card. The credit limit is usually low, and the fees can be high, but many creditors are willing to convert a secured credit card to a regular credit card after a year or two of on-time payments. Another option is to ask a friend or family member who has a good credit history to cosign for you.