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Foreclosure can cause your credit score to drop 100-plus points—here's how to recover

Foreclosures remain on your credit report for seven years, which can mean a big dent in your credit score. CNBC Select takes a look at how to bounce back.

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Similar to medical debt and certain bankruptcies, it takes seven years for foreclosures to disappear from your credit report.

The unfortunate news is that as long as the foreclosure is listed on your credit report, your credit score will be negatively impacted by it. But just how much foreclosure impacts your score depends on what your credit was like beforehand.

The rule of thumb from FICO, a data analytics company that creates credit scoring models, is that higher credit scores are penalized more than lower credit scores. The higher your score was before the foreclosure, the more your score will drop from it. FICO also says that the higher your score, the longer it takes for it to fully bounce back from a reported foreclosure on your credit report. Higher credit scores take more time to achieve in general and a significant drop can set you back more than would a dip in a lower credit score.

Below, Select defines what foreclosure is and recommends what you can do to rebuild your credit if one ends up on your credit report.

What is foreclosure?

Foreclosure is when a lender decides to take ownership of a borrower's home because the borrower has failed to make payments on the mortgage. This is commonly referred to as "defaulting on your mortgage," and when this occurs the lender must take back the property to recover the money owed.

In this scenario, because the borrower didn't follow through on repaying their loan, the lender can seize the borrower's property as collateral for not adhering to the repayment obligation.

How to rebuild your credit

Even though a foreclosure stays on your credit report for seven years, you don't want to wait that long to start rebuilding from the damage.

Below, we offer a couple tips and credit cards that can help you recover your credit score.

  • Pay your bills on time: Payment history is the most important factor for achieving a good credit score. Whether you've paid your past credit accounts on time makes up 35% of your FICO score calculation. We always recommend paying off your balance in full so you don't carry it over to the next month and accrue interest, but when money is tight you should always make at least the minimum payment.
  • Keep your credit utilization rate low: Your credit utilization rate, or how much of your available credit you use, should be no higher than 30% according to experts, or even 10% utilization to see the best score. Lenders and issuers want to see that you don't use all of your credit limit, so the higher the limit you have and the less of a balance you carry, the better. This factor makes up 30% of your FICO score calculation.
  • Apply for a secured credit card: It may sound counterproductive, but one of the best ways to build your credit score back up is to open up new credit and use it following the above two guidelines. Secured credit cards are easier to qualify for and they require a deposit upfront (usually $200) that acts as your credit limit. Applicants for the Capital One Platinum Secured Credit Card might even be able to make a lower deposit and still earn the typical $200 credit limit; (see rates and fees). The varying minimum security deposits for the Capital One Platinum Secured Credit Card are $49, $99 or $200 based on your creditworthiness — all of which come with a $200 credit limit. You can also potentially increase your credit limit if you pay your first five monthly credit card bills on time.

And if you're not interested in a secured credit card, but you have an average credit score right now, the Capital One Platinum Credit Card is the best for rebuilding credit; (see rates and fees). It comes with no annual fee, no foreign transaction fees and a free credit monitoring service, called CreditWise from Capital One®.

Bottom line

If you had to live through a foreclosure because you were unable to pay your mortgage, know that your credit won't be tarnished forever. Foreclosures may remain on your credit report for seven years, but maintaining payments on your other credit accounts during those seven years will help balance out the negative entry. Make sure you pay your bills on time, in full and consider applying for a credit card that can help you bounce back.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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