Rebuilding Your Credit After a Foreclosure or Eviction

Highlights:

• Foreclosures and the rental debt associated with evictions can be financially devastating, but there are steps you can take to help reduce the damage and rebuild your credit scores.
• An eviction won’t directly affect your credit scores, but it could have an indirect effect and make it more difficult for you to rent an apartment.
• A foreclosure can remain on your credit reports for seven years and significantly hurt your credit scores.

If you’re in danger of losing your home or apartment, it’s natural to worry about the long-term financial consequences. Learn what to expect if you’re facing an eviction or foreclosure, and find out how to bounce back if your credit scores take a hit.

What happens during an eviction?

Eviction is the legal process a landlord uses to remove a tenant from rented property after the tenant has failed to pay rent or otherwise honor the terms of their lease.

Here’s how the process generally works: You’ll first receive written notice informing you of an impending eviction. If you fail to vacate the apartment or to negotiate a repayment arrangement, the landlord may file for an eviction in housing court. Here, the court decides whether the eviction is justifiable and legitimate. The judge may or may not issue an order of removal — if they do, you may be forced to leave the premises.

In some cases, you may be able to negotiate a repayment plan with your landlord before they bring the matter to housing court. You can also seek federal or state government assistance, and help is available from some non-profit organizations. Depending on your circumstances, you may even qualify for free legal aid.

Also, be aware that housing laws vary from state to state. Be sure to look into your rights as a tenant based on your specific location.

How does an eviction affect your credit scores?

The good news: An eviction won’t directly affect your credit scores. Your landlord won’t report your eviction to any of the three nationwide consumer reporting agencies (CRAs) — Equifax, TransUnion and Experian — so it will not show up on your credit reports. However, your rental payment information may be included in your Equifax credit report and could negatively affect your credit score.

The bad news: An eviction may indirectly affect your credit scores. If your eviction was caused by your failure to pay rent, your landlord can sell your debt to a collection agency. Collections are generally reported to the three nationwide CRAs and can stay on your credit reports for up to seven years. A debt collection may also negatively impact your credit scores.

How does an eviction affect your credit reports?

Although an eviction doesn’t appear on your credit reports, it can still cause trouble the next time you try to rent an apartment. Landlords sometimes use tenant screening services to gather information about potential renters, including past evictions.

What happens during a foreclosure?

A foreclosure is a legal process lenders use to reclaim property when a borrower defaults on the loan, meaning they fail to make their mortgage payments.

Like eviction law, foreclosure procedures differ from state to state, but generally your lender has the right to initiate a foreclosure after three to six months of missed mortgage payments. Once you receive formal notice of the default, the official process begins. Depending on the state, this involves the courts. The property is then seized by the lender and auctioned. Upon completion of the sale, you could be forced to vacate.

If you find yourself unable to make a mortgage payment, it’s best to contact your lender immediately. They may be willing to work out a repayment plan that allows you to avoid losing your home, especially in cases where your inability to pay is temporary. The foreclosure process can move quickly — lasting as little as two to three months, depending on state law — so it’s critical for you to know your options when you're struggling to keep up.

How does foreclosure affect your credit?

Unlike evictions, foreclosures are recorded on your credit reports. They also have a severe negative impact on your credit scores. You may see a decrease of 100 or more points, depending in part on how high your scores were before the foreclosure. Generally speaking, lower credit scores suffer less damage than higher scores.

How long does a foreclosure stay on your credit reports?

Foreclosures can stay on your credit reports for up to seven years. The good news is that the negative impact of a foreclosure lessens overtime. In some cases, it may even be possible to qualify for a new mortgage while the foreclosure is still visible on your credit reports. Just be sure that your financial situation has stabilized so that you can confidently afford payments on a new mortgage.

How to improve your credit scores after an eviction or foreclosure

Foreclosures and the rental debt associated with evictions can be financially devastating. Fortunately, there are steps you can take to mitigate the damage and rebuild your credit scores.

• Monitor your credit reports and credit scores. Keep a careful eye on your credit reports and scores as you work to rebuild your credit history. Make sure there are no inaccuracies or signs of identity theft and fraud on your credit reports. Also, check for any unpaid balances or accounts that have gone into collections. It's a good idea to tackle this negative information first by paying off as many old debts as you can.
• Work on your payment history. Rebuilding your credit starts with establishing a consistent on-time payment history. In many credit scoring formulas, your payment history accounts for the largest portion of your credit scores. Paying your bills on time and making at least the minimum payment can help improve your scores quickly by demonstrating that you’re a responsible borrower.
• Lower your credit utilization ratio. Your credit utilization ratio represents the amount of revolving credit you’re using divided by the total credit available to you. Generally expressed as a percentage, it factors into your credit scores. Anywhere under 30% is good, but 10% or less is better. Start decreasing your credit utilization ratio by paying off credit card balances in full as often as you can. It’s also helpful not to close old accounts with a zero balance.
• Consider a secured credit card. In some cases, secured credit cards can be a great tool for those looking to rebuild their credit. Designed for risky borrowers, secured cards function like a traditional credit card, offering you an opportunity to prove you can be a responsible debtholder. However, they require a security deposit as collateral. The amount is usually equal to the card’s credit limit. If you can afford this initial deposit and are able to keep up with any debts charged to the card, a secured credit card can be a powerful tool to help rebuild your credit scores.

Neither eviction nor foreclosure has to permanently ruin your credit scores. Know your rights as a tenant or a homeowner and take careful steps to rebuild your credit after the process is complete.