Dealing with a car repossession can be a stressful experience, especially when you’re concerned about your credit score. Understanding how long a car repossession stays on your credit report is crucial for managing your financial future. A “derogatory closure” on an auto loan, often referring to a repossession or voluntary surrender, significantly affects your credit. But how long will this negative mark linger and what does it mean for your creditworthiness?
Understanding Derogatory Closure and its Impact
When your auto loan account is marked with a “derogatory closure,” it indicates negative actions like repossession or voluntary surrender. This also includes situations where the loan was charged off as a loss by the lender or sold to a collection agency due to non-payment. As long as this derogatory account remains on your credit report, it will be factored into your credit scores. However, the impact of older derogatory marks diminishes over time, lessening their influence on lending decisions as they age.
The Seven-Year Rule for Car Repossessions on Credit Reports
A car repossession, along with other related negative statuses like charge-offs or voluntary surrenders, will remain on your credit report for a period of seven years. This seven-year timeframe starts from the original delinquency date. The original delinquency date is the date of the first missed payment that ultimately led to the derogatory status – in this case, the repossession of your vehicle. After seven years from this original delinquency date, the repossession will be automatically removed from your credit report and will no longer affect your credit scores.
What Happens If You Still Owe Money After Repossession?
Following a car repossession or voluntary surrender, the lender typically sells the vehicle to recover the outstanding loan balance. Unfortunately, the sale price often doesn’t cover the entire remaining balance. If you still owe money after the sale, known as a deficiency balance, and fail to pay it, the lender might turn the debt over to a collection agency.
If a collection agency takes over your debt, a separate collection account may appear on your credit report in addition to the original auto loan account with the repossession status. It’s important to note that collection accounts related to a car repossession are treated as an extension of the original debt. Therefore, these collection accounts also adhere to the seven-year removal rule, calculated from the same original delinquency date as the initial repossession.
How Does Paying Off a Repossession Debt Affect Your Credit?
Paying off a car repossession debt can have a positive, though not immediate, impact on your credit. If you pay off the balance on a repossession, charge-off, or foreclosure account, your credit report will be updated to reflect a “paid” status for that debt. However, this update doesn’t remove the negative history of the repossession itself.
If the debt has been sold to a collection agency, paying the collection agency will update the collection account to “paid.” The original repossession account will still show the derogatory history but will indicate that the debt was transferred or sold. While paying off a repossession won’t erase the negative mark, it can contribute to a gradual credit recovery. Lenders often view paid debts more favorably than unpaid ones, which might improve your chances of securing new credit sooner. For instance, many mortgage lenders require that past-due accounts be settled before approving a home loan.
Furthermore, some newer credit scoring models disregard paid collection accounts when calculating your score. Therefore, paying off a collection account resulting from a car repossession could potentially lead to a more immediate improvement in your credit scores.
Rebuilding Your Credit After a Car Repossession
Dealing with a car repossession is a setback, but it’s not the end of your credit journey. Rehabilitating your credit history is possible. As mentioned, paying off any outstanding balance after the vehicle sale is a crucial first step. Beyond that, consider these strategies to improve your creditworthiness over time:
By taking these steps and managing your credit responsibly going forward, you can gradually rebuild your credit and mitigate the long-term impact of a car repossession.
