5 Ways to Repair Your Credit After a Short Sale
The biggest impact to your credit score from a short sale is usually caused by the late mortgage payments. Your credit score is determined by several factors and one of the most important is your payment history. Other factors include the total amounts owed, new credit cards, and the length of your credit history.
Because the sale of the home is “short” the full amount owed on the mortgage when you sold it, your lender may report it to the credit bureau as “not paid in full.” When you do a short sale, the short sale approval letter will usually outline how the short sale will be reported to the credit bureau.
But a poor credit score won’t stay on your record forever and it can be repaired. Old problems with credit count for less towards your score so the sooner you manage your credit responsibly, the sooner you can improve your credit score.
Here are 5 steps to getting your credit back on track:
1. Get Your Credit Report:
This is the first step in repairing credit. Review your credit report and make sure that the information is accurate. The nationwide consumer reporting companies, Equifax, Experian, and TransUnion, are required to provide you with a free copy of your credit report, at your request, once every 12 months. You can obtain your report by going to AnnualCreditReport.com
2. Cut Back on Expenses:
Outline where you can save each month so more money can go towards paying down debt. Even small changes such as reducing your cable service plan or bringing lunch to work rather than ordering out can make a big difference. And learn to pay for items and services with cash. This will save you money in the long run since there are no fees or interest charges on the purchase. It will limit the amount you spend and it will get you into the habit of not using your credit cards.
3. Double Up on Payments:
This is one of the fastest ways to cut down debt. If you’re able to do this on even one credit card, you will improve your credit score faster. Credit card companies charge interest daily, so when you make smaller payments on your credit card twice a month rather than once a month, you accrue less interest. (Call your credit card company to make sure they will allow this.) This method works best with large balances on high-interest rate cards. If you carry a smaller balance, it’s best if you just pay off the card monthly.
4. Pay Bills on Time:
This sounds obvious, but 35% of your credit score is based on payment history. Late payments on both installment loans and credit cards can have a major negative effect on your score. And don’t move your credit card debt around. If you transfer your credit card debt and close the account, it reduces your available credit while your past credit history is reduced. This affects your debt-to-available credit ratio, which should be kept around 30% of your credit limit. If you have trouble making payments on the card, negotiate with your present credit card company to try to get lower interest rates. Once you catch up you can start making higher monthly payments.
5. Keep Older Credit Card Accounts Open, Even if You Don’t Use Them:
One factor in your credit score is based on how long your accounts have been open, and keeping the good history of making payments can positively affect your credit score. Late payments associated with an old account don’t disappear from your report if you close the account. And don’t open new accounts to increase your available credit. Applying for additional cards trigger credit inquiries, which can lower your credit score. Having available credit you don’t use doesn’t lower your score.
Bonus Tip: Be Patient!
It takes time to get into debt and it will take some time to get out of it. Get an accurate picture of the total debt you owe and set up reminders for when each payment is due. This will help you set up a realistic budget and action plan to pay down your debt.
And don’t forget to track your progress. It’s easier to stay motivated when you can see the results of your work.
Related blog post: Buying a Home After a Short Sale or Foreclosure