One more thing for homeowners to worry about when facing foreclosure is keeping on time with all of their other debts, such as credit cards and car loans. But the credit cards are often the most dangerous to fall behind on, as lenders may drastically increase interest rates and add hundreds of dollars in extra fees in just a few months. Homeowners also need to worry about having access to their credit lines cut off in the near future. Thankfully, however, most credit card companies will do nothing negative to homeowners just because they are facing foreclosure on the mortgage.
During the foreclosure process, there will be not adverse effects to homeowners’ credit cards as long as they are keeping on time with the payments on these credit lines. If they fall behind, of course, they may face severely negative consequences from creditors and will have even more damage to their credit scores. But simply being in foreclosure itself will not cause homeowners to lose their credit cards or have interest rates increase or extra charges added.
Many credit card companies issue contracts that state that the company may be able to raise interest rates on the card even if the borrowers never miss a payment on that line of credit. As long as they miss a payment on any other credit card, every company can raise rates. But even if a credit card is with the same bank as the mortgage, there is little that a mortgage company can do if a borrower’s credit cards have not gone into default. Mortgage lending and credit card lines are often done by different subsidiaries of a large bank, so either branch may not be aware of a default in the other line of credit.
However, after a foreclosure has ended, homeowners should be careful not to close out any credit lines that they may plan on using in the future. Because of the damage to their credit reports that late mortgage payments and a foreclosure will cause, it will be difficult, if not impossible, to qualify for new loans or credit lines with competitive interest rates for years after facing foreclosure. Despite the fact that the owners may have been able to stop foreclosure, there will be severe damage to their credit reports from the late payments.
Unless the homeowners voluntarily close their accounts or fall behind on the payments, the credit card companies will not do very much at all before, during, or after the home foreclosure process. The companies have no reason to take any negative actions against the borrowers just because they are facing foreclosure on a property they own. In fact, as long as the homeowners can keep on top of their credit card payments, they may try and request a higher credit line during foreclosure to be able to use some of that money to get back on top of the mortgage, although this is not a very sustainable solution.
On a somewhat unrelated note, though, just as homeowners who have Home Equity Lines of Credit on their properties and have had access cut off, credit card customers may see credit cards start to decrease the total available to borrowers. Banks are beginning to realize that there may be a large risk of default in consumer lending and are taking actions now to cut off access to credit for debtors in the greatest danger of falling behind (which may be nearly half of them, depending on how deep the recession will be). So, before facing foreclosure, homeowners may want to consider cutting up their current credit cards and getting used to a life without borrowing money, since their lenders may cut off their access soon anyway.
So, unless homeowners fall behind on their credit card payments while also facing foreclosure, their lending companies may do little to cut off their access or raise rates. If credit card limit restrictions are imposed, it may be more a sign of the bank’s fear of large defaults economy-wide, but most creditors may not even be aware of homeowners falling behind on their mortgage payment. However, due to the negative consequences of credit cards in the first place, it may be better for homeowners to take care of the issue and get rid of unnecessary cards before they become a problem later on.