Experiencing a car repossession, or “repo,” is a significant financial setback. Beyond the immediate loss of your vehicle, many people worry about the lasting impact on their credit. If you’ve faced a car repo, you’re likely wondering, “how does a car repo stay on your credit?” This article provides a clear explanation of how car repos affect your credit score, how long they remain on your credit report, and what steps you can take to rebuild your financial standing.
What Exactly is a Car Repossession?
A car repossession happens when you fail to keep up with your auto loan payments, and the lender reclaims the vehicle. This is often referred to as a “derogatory closure” of your auto loan account. It signals to lenders that you haven’t honored your financial obligations, making it a negative mark on your credit history. Sometimes, instead of repossession, a borrower might choose to voluntarily surrender the vehicle to the lender, but both repossession and voluntary surrender are viewed similarly negatively by credit scoring models.
The Negative Impact of a Repo on Your Credit Score
A car repossession is undoubtedly damaging to your credit score. Credit scoring models see a repo as a major negative event, reflecting a higher risk for lenders. The severity of the score drop can vary based on your overall credit profile before the repo. If you had excellent credit, the drop might be more substantial compared to someone with already fair or poor credit.
It’s important to understand that as long as the repossession remains on your credit report, it will factor into your credit score calculations. However, the weight of negative information diminishes over time. A recent repo will have a more significant negative impact than one that occurred several years ago.
How Long Does a Car Repo Stay on Your Credit Report?
Generally, a car repossession will remain on your credit report for seven years from the date of the original missed payment that led to the repossession. This date is known as the original delinquency date. Regardless of whether it was a repossession or a voluntary surrender, the seven-year clock starts ticking from this original delinquency date.
After seven years, the repossession should be automatically removed from your credit report by the credit bureaus (Experian, Equifax, and TransUnion). Once removed, it will no longer affect your credit scores.
What Happens if You Still Owe Money After the Repo?
After a car is repossessed, the lender will typically sell it to recover some of the outstanding loan balance. However, the sale price might not cover the full amount you still owe. The difference between what you owed on the loan and the sale price, plus any repossession and sale expenses, is called a deficiency balance.
You are legally responsible for paying this deficiency balance. If you don’t pay it, the lender may:
- Send the debt to a collection agency: This can result in a separate collection account appearing on your credit report, in addition to the original repossession account.
- Sue you for the deficiency balance: The lender can take legal action to recover the money owed.
Collection accounts related to a car repossession are also treated as stemming from the original debt. They will also be deleted seven years from the original delinquency date, even if the collection account appeared on your report later.
Will Paying Off a Repo Help Your Credit?
Paying off the deficiency balance after a car repo is a positive step, but it won’t erase the repossession from your credit history. The credit report will be updated to show the debt as “paid,” which is better than “unpaid.”
If the debt was sold to a collection agency, paying the collection agency will also update the collection account to “paid.” Importantly, some newer credit scoring models may disregard paid collection accounts in score calculations. This means that paying off a collection related to a repo could potentially lead to a slight improvement in your credit score sooner than waiting for the seven-year period to pass.
While paying off the balance won’t remove the repo, it can be viewed more favorably by future lenders compared to an unpaid debt. For example, mortgage lenders often require that past-due accounts, including deficiency balances from repos, are settled before they approve a home loan.
Rebuilding Credit After a Car Repo
Recovering from a car repossession takes time and consistent effort. Here are key steps to rehabilitate your credit:
- Pay off the Deficiency Balance: As discussed, settling the outstanding debt is crucial, even if it doesn’t immediately remove the repo.
- Establish Positive Credit History: Focus on building a positive credit history moving forward. This includes:
- Secured Credit Card: Consider getting a secured credit card. Use it responsibly and pay your balance in full each month.
- Timely Payments: Make all your bill payments on time, every time. Payment history is a major factor in credit scores.
- Keep Credit Utilization Low: If you have credit cards, keep your balances low relative to your credit limits.
- Monitor Your Credit Report: Regularly check your credit reports from all three major bureaus to ensure accuracy and track your progress. Dispute any errors you find.
While a car repossession can significantly impact your credit, understanding how long it stays on your report and taking proactive steps to rebuild your credit are essential for regaining financial health. Focus on responsible credit management, and over time, the negative impact of the repo will lessen.
