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

If you can't make your mortgage payments, your lender may initiate foreclosure proceedings to claim the property and sell it. Not only does that mean you'll have to leave your home but it will have a devastating effect on your credit and make it harder for you to buy another house.

How much a foreclosure impacts your score depends on what your credit was like before. According to FICO, the data analytics company whose scoring models are used in 90% of lending decisions, higher credit scores are penalized more than lower ones.

And the higher your score, the longer it takes for it to fully bounce back from a 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 an equivalent dip in a lower credit score.

Below, CNBC Select explains how foreclosure can impact your credit and what you can do to rebuild it.

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.

Similar to bankruptcy, it takes seven years for a foreclosure to disappear from your credit report.

As long as it remains on your report, it will be difficult to obtain a conventional mortgage, according to the Consumer Finance Protection Bureau. You may qualify for an Federal Housing Administration (FHA) loan. or a subprime mortgage, which could have a much higher interest rate that increases over time.

Even though a foreclosure stays on your credit report for seven years, don't want to wait that long to start rebuilding. Here are several ways to repair 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 rebuild your credit is to apply for new credit and use it following the above two guidelines. Secured credit cards are easier to qualify for and they require a deposit (usually $200 TO $300) that acts as your credit limit.

The Capital One Platinum Secured Credit Card is one of our favorite secured cards because of the option for a lower deposit. The varying minimum security deposits for the Capital One Platinum Secured Credit Card are starting as low as $49, $99 or $200 based on your creditworthiness — all of which come with a $200 credit limit (see rates and fees). If you make on-time payments for five months, Capital One will review your account for a possible credit limit increase

Unlike most secured cards, the Discover it® Secured Credit Card earns rewards. Cardholders automatically earn 2% cash back at gas stations and restaurants, up to $1,000 each quarter, and 1% cash back unlimited on all other purchases. As a welcome bonus, Discover will match all the cash you’ve earned after the first 12 months.

Discover will also review your account after seven months to see if you can transition to an unsecured line of credit and return your $200 deposit.

If you had to live through a foreclosure, know that your credit won't be tarnished forever. Keeping current on your other accounts will help balance the negative entry and a secured credit card can also help you bounce back.

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