How Repossession Affects Your Credit

A repossession, which can occur if you are delinquent on auto loan or mortgage payments, negatively impacts your credit score and also puts your repossessed car or home in jeopardy of being sold or auctioned off. Here’s what you need to know about how repossession affects your credit health.

Repossession Damages Your Credit

Repossession is unfavorable to have on your credit report because it tells future lenders and banks that you are at high risk of defaulting. A derogatory mark as serious as repossession will lower your credit score and compromise your chances of getting favorable rates and approval on future loans and credit.

A bank or lender can repossess your vehicle or home if you are behind on bill payments or fail to fulfill your loan obligations, which can sink your credit score upwards of 100 points. If you don’t settle the outstanding debt as quickly as possible, you are in jeopardy of losing your car or home in a sale or auction. The lender or bank also has the right to take you to court and a judgment against you can be reported to the bureaus and damage your credit further.

If your car or home is sold for less than you originally paid for it, you still owe the outstanding balance and that debt will reflect on your credit report until it is paid. Once you settle the repossession and pay the debt it full, the credit bureaus typically continue to report the repossession on your credit report for seven to ten years.

Building Credit After Repossession

After a repossession, pay off the outstanding debt as soon as possible by talking to your lender about a debt settlement or repayment plan. Then, request that the bureaus report the repossession as resolved by noting it as “Paid in Full” or “Satisfied” on your credit report, which could lessen the impact of the repossession on your credit report.

Aside from making that request, the only way to build credit after repossession is to practice good credit habits. As time passes, the repossession on your credit report will have less and less impact on your credit score, and eventually stop affecting your credit score in seven to ten years. Good credit habits include paying bills on time consistently, keeping your credit use below 30% of your credit utilization rate, and other credit-building strategies.

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