How Repossession Affects Your Credit

Repossession can cost you more than your car. Late or missed car payments can hurt your credit. If your car is repossessed, the hit to your credit will be even more significant. This is true even if you turn in your car voluntarily. And, you may still owe the auto lender money after they take your car. It’s important to understand your rights and options if you’re behind on your car payments. Chances are, there are things you can do to make the situation less consequential.

Sometimes, you can stop a repossession action. If it’s too late for that, you can rebuild your credit over time. Here’s what you need to know if you’re facing repossession or have already lost your car. 

What Is Credit? 

Most people use the word “credit” to describe two different things. One is your credit report, also called “credit history.” Your credit report lists your accounts, payment history, collection agency  accounts, outstanding balances, and other information. Credit bureaus provide this information to lenders when you apply for an auto loan, credit card, or other credit. Finance companies, credit card issuers, and other lenders use this history to decide whether you’re a good risk. If you’re a good risk, you’ll have better access to credit. And, you’ll usually pay less in fees and interest. Late payments, missed payments, collection accounts, repos, and other negative items hurt your chances.

The other is your credit score. Your credit score is based on information contained in your credit report. 

Your credit score is a quick, simple way for lenders to get a general idea about your credit history. That three-digit number may be the reason you are approved or denied for a loan. Credit scores can also affect the interest rates and fees you pay. Like a poor credit history, lower scores generally mean higher interest and other costs. Your credit score can even have a negative impact on other areas of your life. For instance, you may have trouble renting an apartment or may pay more for car insurance with bad credit. It may even hurt your employment opportunities. Good credit keeps your options open and can save you money.

Some of the most important factors in calculating your credit score are: 

• The amount of your available credit you’re using--the lower the better

• Percentage of on-time payments on your accounts--the higher the better

• The average age of your credit accounts--the longer the better

• New accounts and recent applications--keep this number low

You may think not using credit at all is a good thing. In a way, it is. If you only pay cash, you’re not taking on debt. You can’t spend more money than you have. But, having no credit history can hurt. Lenders won’t have any way to know whether or not you’re responsible with your bills. That means you may not have access to credit when you need it. Responsible use of credit cards and other accounts is the best way to build good credit.

How To Check Your Credit Report

You actually have multiple credit reports, and they usually aren’t exactly the same. The most consequential ones come from the three major credit bureaus: TransUnion, Equifax and Experian. You can get copies of your credit reports online or by mail. Each credit bureau has to give you one free report each year. But, your credit score isn’t included in the free report. If you want your score, you’ll have to pay a small fee.

You can get your free reports by visiting each credit bureau’s website, or through a combined site. Need a current credit report before the year is up? No problem. You can buy an updated report directly from the credit bureau. During the Covid-19 pandemic, it’s even easier. All three major credit bureaus are offering free weekly reports. 

How A Car Repossession Can Affect Your Credit

Vehicle repossession will result in a negative mark on your credit. You may think that if you can’t keep up your car loan payments, turning in your car will help. But, voluntary surrender of your vehicle won’t keep a repossession action off your credit history. In fact, a repossession may mean multiple negative entries on your credit report, including: 

• Your history of late payments on your auto loan

• The repossession itself

• A judgment, if the lender sues you for a deficiency balance

• A collection account, if your debt is sent to a collection agency or sold

What Is A Deficiency Balance? 

After a car is repossessed, the borrower often ends up owing the lender money. That’s partly because automobiles lose value quickly. So, the loan balance may be higher than the value of the car. In most states, you can be held responsible for the remaining balance.

Imagine that your loan balance is $10,000 when your car is repossessed. But, the car is sold at auction for $6,000. The lender also charges you for towing, costs of sale and other expenses. Maybe those total $1,000. 

The amount you owe the lender is decreased by the $6,000 they got at auction, then increased by the $1,000 they spent. Now, you have no car, but still owe the lender $5,000. That remainder owed is called a deficiency balance. 

You may be able to make a payment plan. In most states, if you don’t come to an agreement, the lender can take steps to collect the deficiency balance. For example, they may turn your account over to a collection agency or sell it to a debt buyer. They may even get a judgment against you and try to garnish your wages or bank account. 

If you’re eligible to file for Chapter 7 bankruptcy, a deficiency balance can usually be discharged at the end of this process. This means that the debt you still owe could be erased. Your credit will still take a hit, but you won’t be stuck with the bill. Bankruptcy can even stop wage garnishment and other collection action that is already underway.

Avoiding Repossession

Your first instinct when facing repossession will probably involve protecting possession of your car. But, that isn’t always realistic. If you know you can’t keep up with your car payment schedule, it may be best to look for another solution. Some possibilities include: 

• Talking to your lender about skipping or reducing payments for a time

• Trying to refinance your car 

• Selling your car to pay off the loan

If you know you’re fighting a losing battle and won’t be able to keep your car, look for an option that will protect your credit.

How To Improve Your Credit After Vehicle Repossession

One of the toughest things about rebuilding credit is that you need active credit accounts to build up a positive history, but it’s hard to get new credit with a bad credit score. It’s definitely possible to rebuild your credit, though! The important thing to remember is that your credit report is always changing. Older items become less important and then drop off completely. New entries carry more weight and gradually replace the old ones. Small steps in the right direction can strengthen your personal finances and help rebuild credit.

Some helpful steps include: 

• Making sure payments on existing accounts are made on time and that you pay at least the minimum amount due

• Reducing the percentage of available credit you’re using by paying down credit card balances

• Keeping older accounts open to increase the average age of accounts

If you don’t have accounts you’re currently making payments on, consider applying for a low-limit credit card or small loan. Taking out too much credit can be bad for your credit score. But, you need some open accounts to build credit history. Just remember to keep credit card balances low and make all of your payments on time.

You may also want to talk to a credit repair attorney. You can rebuild credit on your own. But, if you aren’t having any luck or you are working toward a specific goal, professional guidance can be helpful. 

Let’s Summarize...

Your credit score matters. A good credit score means access to credit when you need it. People with high scores also get better deals on interest rates and fees. Late car payments and missing payments hurt your credit score. This negative effect is even more pronounced if your vehicle is repossessed. In short, you want to avoid repossession if you can.

If you’re in danger of repossession and don’t know how to stop it, talk to a lawyer. An attorney can explain your options and the pros and cons of each. And, if you can’t avoid repossession, a credit repair lawyer can help you rebuild your credit history and your credit score over time.