Your credit rating changes according your financial activities. Your score goes up and down based on accounts you open and close, your loan and credit card balances and whether you pay bills by the deadlines. Major events have a significant and long-lasting impact on your credit score. For example, foreclosure stays on your credit records for seven years, according to the Federal Trade Commission.
Definition
Foreclosure involves the repossession of a house by a mortgage lender when the borrower defaults on the loan. A mortgage is a form of secured credit, with property as the collateral. The lender takes the property and sells it to cover the debt. The process typically starts after a borrower is 90 days delinquent on his payments, according to the Lendingtree loan website. Mortgage holders sometimes work with you if you inform them you cannot pay as agreed as soon as you realize there is a problem.
Credit Score Effects
Your credit score drops significantly when you go through a foreclosure. The exact point loss varies, depending on the status of your other loans and credit cards, but CNN Money writer Les Christie warns that the drop averages 85 to 160 points. Your credit also takes a hit in the months leading up to the foreclosure. Christie reports that an initial 30-day delinquency can reduce your score by 40 to 110 points, and you may lose 70 to 135 points by the time you are 90 days late.
Impact
A subprime credit score impacts your ability to open credit accounts and raises the cost of borrowing money and getting insurance policies. MSN Money writer Liz Pulliam Weston warns that banks avoid credit card applicants with scores below 675, and subprime interest rates cost cardholders who carry a balance hundreds or thousands of dollars annually. Loretta Sorters of the Insurance Institute reports to CNN Money that people with fairly good scores pay about $115 annually for car insurance. Interest and insurance rates rise as your score goes down.
Alternative
A short sale is a foreclosure alternative in which your mortgage lender lets you sell your home for less than your loan balance, according to Bankrate. These sales do not hurt your credit if the bank agrees to accept the sale amount as payment in full and reports the loan paid as agreed to the credit bureaus. Lenders are not obligated to agree to short sales, although many allow this practice to avoid the time and expensive of a foreclosure. They are more likely allow this type of sale if your mortgage is already badly delinquent.
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