How Do Repossessions Impact Your Credit?
How Do Repossessions Impact Your Credit?

How Do Repossessions Impact Your Credit?

April 5, 2024
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Sometimes bad things happen to good people. We miss payments, we fall behind, and do the best we can to keep things afloat. Repossession can show up on credit reports and impact credit, but it won’t stick around forever.

Quick Answers

  • A repossession can result in a derogatory mark on credit reports, which can stay on the reports for up to seven years.
  • It’s hard to know exactly how much a repossession will affect credit scores because credit-scoring companies use different scoring models.
  • There are two types of repossession: voluntary and involuntary. A voluntary repossession could result in the borrower paying less in fees.
  • There are ways to rebuild credit after a repossession, including using credit responsibly and doing things like paying your monthly statement on time every month.

What is a repossession?

Repossession occurs when a debtor defaults on a loan and the creditor takes back the financed collateral. Repossession might happen when a borrower fails to make payments on personal property—like a car—that’s purchased with credit.

There are two kinds of repossession:

  • Involuntary: In an involuntary repossession, the lender typically uses a repossession specialist to take the property when the buyer defaults on the loan.
  • Voluntary: In a voluntary repossession, the borrower gives up the property to avoid an involuntary repossession and the extra cost that comes with it.

The lender may either keep the repossessed item or sell it to recover at least some of the loan balance. The borrower might still owe money after the repossession if the lender doesn’t recover enough.

How soon repossession happens after a missed payment could depend on the lender, the product that’s financed and the state in which you live. For example, the Federal Trade Commission (FTC) says there are several states where a lender can repossess a car as soon as the borrower defaults on their loan. But the FTC also says that lenders may offer borrowers ways to bring the account current and avoid repossession.

You might be able to stop a repossession and keep your property if you contact your lender as early as possible. Your lender may be able to work with you on a repayment plan, change your payment schedule or revise part of your contract. It is important to talk to your lender as they are most likely willing to work things out.

How does repossession affect your credit?

If your car is repossessed, your lender could report this information to the credit bureaus, and it could show up as a “derogatory mark” on your credit reports. These negative marks can be caused by:

  • Late payments: A lender can report a late payment to the credit bureaus, which can impact your payment history and, in turn, your credit scores.
  • Loan default: If you default on a loan, such as a vehicle loan, it could also leave a negative mark on your credit reports. Loan defaults can stay on reports for up to seven years.
  • Collections: If there’s still a balance after the lender sells your repossessed property and you don’t pay it, they could turn the account over to collections.

Credit-scoring companies use the information from your credit reports to calculate credit score. So, credit scores could drop from the repossession itself and from related events that impact payment history. That’s because payment history is an important factor in calculating your credit scores from both FICO® and Vantage Score®.

But it’s hard to determine the exact impact a repossession can have on credit scores. That’s because it can depend on several factors, including which credit bureau provided the information and which credit-scoring model was used in the calculation.

And keep in mind that lenders might take legal action too. Although court judgments no longer appear on credit reports or factor into credit scores, they’re still part of the public record. If a lender looks up your public records, this could make it harder to qualify for future loans.

How long does a repossession stay on your credit report?

A repossession can stay on credit reports for up to seven years. According to Experian®, the seven-year countdown starts on the date of the first missed payment that triggered the repossession. But Experian says that once that time ends, they’ll automatically remove the account from your credit report.

How to rebuild credit after a repossession

Improving your credit after a repossession won’t happen overnight. But there are steps you can take right away to start rebuilding your credit.

  • Pay off overdue bills. If you have other overdue accounts, you could contact each lender to discuss your options. Bringing those accounts current could improve your scores over time.
  • Don’t max out credit cards. The Consumer Financial Protection Bureau (CFPB) says that keeping credit card balances low can help scores. The CFPB suggests aiming for a credit utilization ratio below 30%.
  • Make on-time payments. Payment history is one of the most important factors of your credit scores—counting for 35% of your FICO® score. The CFPB says paying each bill on time, every time, can help get your scores back on track.
  • Only apply for the credit you need. Avoid applying for a lot of credit in a short period of time. Doing so could cause your credit scores to drop.
  • Monitor your credit. Regularly, check your credit reports for any errors, which could lower your scores. If you find a mistake, you can dispute it with the proper credit-reporting bureau.

Repossession: The Ins & Outs

Repossession of a car or other personal property can impact credit for several years. But it won’t last forever. A repossession typically stays on credit reports for seven years. However, you can take steps to improve your credit before the seven-year period ends.

Can I get a car loan with a repossession on my credit?

Short answer, YES! Credit Cars specializes in offering quality vehicles to those who challenged credit history. Credit Cars is Orlando, Florida’s best buy here pay here dealership operating since 1963. If you need a car but have bad credit, visit our lot today.

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