For millions of people across the nation, the possibility of foreclosure has become a harsh reality, and many are dealing with the effects foreclosure has on their credit score rating. If you are one of the people affected by the recent crisis, you may be wondering “How Will a Foreclosure Affect My Credit Score?”

How Will a Foreclosure Affect Your Credit Score?

If you are late with your mortgage payments, this will surely have an effect on your credit score rating.  This is not hard to figure out. However, you may be wondering how big an impact it will have on your score.

The exact answer to this question may not easy to find. That is why you may be interested to learn what Fair Isaac, which developed FICO scores, have to say about this.

Foreclosure Effect on Credit Score

The following are the average hit your credit score will take:

See the chart on the right to see how being late with payments affected two hypothetical borrowers.

How foreclosure impacts your credit score

30 days late: 40 – 110 points

90 days late: 70 – 135 points

Foreclosure, short sale or deed-in-lieu: 85 – 160

Bankruptcy: 130 – 240

Effect of foreclosure on credit score: To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a score of 680 and the other with a very good score of 780.

The consumer with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records. In these scenarios the total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score. Via money.cnn.

Other sources estimate the damage even higher. Some say that foreclosure will cause a credit score to drop sharply, typically by 200 to 300 points. That would drop a score of 700 — considered a ‘good credit score” — to as low as 400 — considered pretty bad. The minimum FICO score is 340.

Unfortunately, for a lot of people facing foreclosure, the mortgage isn’t the only payment that’s late. If you are also late on other payments, such as car loan payments, student loan or are late on credit card payments, your credit score rating can drop even more within a very short period of time.

However, despite the problems a poor credit score can cause, if you are faced with totally unaffordable mortgage, it’s better to deal with that right away and cut your losses quickly; instead of prolonging the problem, making it even worse.

The good news is that even though a foreclosure can remain active on your credit report for seven years and make it difficult in certain lending scenarios, your credit score is not ruined for life. If you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as two years. The important thing to remember is that a foreclosure is a single negative item. If you manage to keep other payments up to date, it will be much less damaging to your credit score than if you had a foreclosure in addition to defaulting on other credit obligation.

“A foreclosure is not the end of the world. Most people will see their credit scores back in the high-600 range within two to three years,” says Patrick Ritchie, author of “The Credit Road Map.” “I had a mortgage client who went through a foreclosure and chapter 7 bankruptcy and three years later had a 690 middle FICO score.” via realestate.aol.

When you reach the seven-year mark, check your credit report to make sure the credit bureaus are still not reporting the foreclosure. You may need to send them a written notice in order to have the foreclosure removed after it has expired.

Read more about credit score ranges on this blog.

Your credit score is a reflection of your financial well being. Whatever you do financially gets recorded in the credit report. Your credit score is vital as it determines your eligibility of availing financial benefits. Whether you are planning to take out a mortgage, apply for a credit card, buy an insurance policy or look for a job, your credit score in some way impacts all.

If you have ever taken out a loan, applied for a credit card, filed bankruptcy, you are bound to have a credit report. Your credit report is made use of different market participants to assess your finances and consequently your financial health.

How does your credit score affect you?

There are various components that make up your credit score. They are as follows –

1. Payment history:

How well you have maintained your payment schedule makes up 35% of your credit score.

2. New credit:

If you avail new credit, it makes up 10% of the credit score. If you have been taking out many loans lately, it has a negative impact on lenders.

3. Outstanding balance:

The amount you owe makes up 30% of your credit score. You may have multiple debt accounts.

4. Different types of credit you have used:

This component makes up 10% of your credit score. It indicates the types of credit you have availed. If you have a balanced “mix” of different types of credit, it usually enhances your credit score.

5. Duration of credit history:

The length of credit score makes up 15% of your credit score. A longer credit history allows lenders to ascertain your creditworthiness.

You can assess your financial health by reviewing your credit report. Information on your credit report stays on for few years. And if you have filed bankruptcy, it stays on for a period of 7 to 10 years. Similarly, if you have faced foreclosure, the same remains in your credit report for 7 years.

One of the most important factors is you cannot remove negative information from the credit report at your own will. You may come across companies offering to remove negative information from your credit report for a fee. This is however not possible. There are no shortcuts to a debt free life and you have to work towards improving your credit rating.

The State regulators and attorney generals have been receiving innumerable complaints from consumers about debt help firms that are promising consumers to remove inaccurate information from the credit report. Similarly, there are many debt help firms that charge very high upfront fees but fail to deliver what they promise.

Read more about credit score ranges on this blog.

A good credit score means lower interest rates – and monthly payments. That is why it’s worth the effort to check your credit score rating regularly, correct any inaccuracies that you find, and try to improve your rating – if you happen to have a bad credit score.

While there are certain things that can be done to improve your credit rankings, be aware of the various “fix my credit kits” that are mostly scams designed to take advantage of desperate people in difficult financial situation.

Myth: I can buy a kit to clean up my credit, and all my past problems will be washed away.

Truth: The only thing that can be removed – “cleaned” -  from your report are inaccuracies,so these kits are scams.

Remember this: nothing can be taken off your report unless the item is inaccurate. The Federal Fair Credit Reporting Act dictates how consumers and creditors interact with the credit bureaus. Bad credit drops off your credit report after seven years. If you have a Chapter 7 bankruptcy, it will stay there for ten years.

If you have an error to be corrected, take care of that yourself. Accurate bad credit stays on your report unless you lie. But lying for the purpose of getting money is a fraud, and you should NOT do it.

Credit-repair companies are mostly scams. The Federal Trade Commission regularly closes down these fraudulent operations. Some repair kits will tell you to dispute all bad credit and demand to have it removed, even if the item is reported accurately. Some kits even suggest you get a second identity and a new Social Security number. Do not fall a victim to such scams!

If you get a new identity, you get a brand-new credit report and lenders will not be able to find out about your past bad record. However, this is a fraud, and if you do this, you may go to jail.

5 Tips How to Improve A Bad Credit Rating

Here are 5 things that you can do to start improving your rating:

1. opening a secured credit card – where your credit limit is the amount of money you deposit into your account
2. take out an installment loan from your bank. By making the regular payments to the bank on time, you will be building good credit. To get the best rate, try credit unions and small, local banks. These institutions tend to be more competitive than larger banks.
3. piggyback on someone else’s good credit. Ask a close friend or family member to allow you to become a certified user of a credit with them
4. use store credit cards when you shop. However, be sure to pay off the balance in full each month!
5. And most of all remember to pay your bills on time!

Work on cleaning your credit report and improving your relationship with money. Over time your credit report will clean itself.

But remember, improving credit scores takes time. He said scores do not always reflect an individual’s recent spending habits as the consumer has been working to pay down debt and improve his financial standing.  Credit scores really measure what you’ve done, not what you’re doing now, so they  may not show what you’re doing now to turn the ship around.

Read more about credit score rating and credit score ranges chart.