But if you follow some simple tips, you can reestablish your credit and restore it to its former glory in a few short years. Hereâ€™s how:
Start slow. â€śWhat happens to people whoâ€™ve been in financial distress is that they just go in and do it [apply for more credit],â€ť said Saundra Davis, a financial planner and management consultant in San Francisco. â€śYou want to feel better, and it feels good to be able to walk in and sign your name on a new credit card. Itâ€™s an emotional boost, but you canâ€™t let your emotions run away with you.â€ť If you do, you may be digging yourself into a worse credit score.
Ten percent of your credit score is based on credit inquiries. Every time a company requests information on your credit, it dings your credit score. And if those credit companies reject your application, itâ€™s even worse.
Go back to basics. Thirty-five percent of your credit score is based on how well you pay your remaining debts. And if youâ€™ve been through foreclosure, itâ€™s likely that youâ€™re delinquent on other debts as well, says consultant Lathea Morris, co-founder of New Jersey-based The Credit Alternative.
So spend some time post-foreclosure getting your financial house in order.
–Track spending for 30 days.
–Figure out how much money you actually bring in.
–Save up to six months of income for an emergency fund. If you get behind, it wonâ€™t affect your ability to pay bills on time–and it wonâ€™t hurt your credit score.
â€śOnce you build the family expenses around whatâ€™s actually coming into the house, you can focus on rebuilding your credit,â€ť she said.
Avoid scams. As tempting as they are, steer clear of rent-to-own outfits, Davis says. â€śRent-to-own can sound like a good deal, but itâ€™s just as bad as going to a payday lender and will probably land you in greater debt,â€ť she says. â€śA lot of people whoâ€™ve been through foreclosure feel like they have to take whatever they can get. But just because youâ€™ve been through foreclosure doesnâ€™t mean you shouldnâ€™t look for the best interest rates. Think about the true cost of what youâ€™re paying for those things you get from a rent-to-own place.â€ť