How Does A Repo Affect Your Credit?

Repo and its Impact on Your Credit Score

It is very humiliating to have your car or any other asset repossessed and this makes it important to avoid it at all costs. Besides having your car or vehicle taken from you, repossession can also significantly harm your credit score, and subsequently, it becomes very difficult to qualify for future loans and credit. Let’s take a closer look at how a repo can affect your credit.

What Is A Repo?

Repo, or repossession, is the procedure by which a lender takes back an item—usually an automobile or another kind of transportation—after the borrower has neglected their responsibilities as stipulated by the loan agreement. Defaulting is the state in which you have not paid the agreed-upon total. Should you be far behind, the lender may lawfully seize the vehicle and auction it to help offset some loan debt.

Boats, RVs, motorbikes, furniture, electronics, and many more stuff might also be in danger of being taken back. Still, the most often occurring kind of security interest is frequently vehicle repos. They could choose to come and take the car frequently without warning using the services of a repossessing firm.

How Does It Affect Your Credit Score?

Borrowers whose vehicles or other valuable properties were repossessed may see their credit scores drop. It will be seen that most repos will lead to a decrease in the value between 100-200 points, but it might be even worse.

A repo informs future lenders that you are extremely risky and have defaulted on a previous loan. It does appear on your credit report and will greatly impact your creditworthiness for the next several years if proper effort is not made to rebuild your credit.

There are a few main ways a repossession hurts your credit.

Payment History

Payment history is a key element of the FICO score, contributing to 35% of the total credit score. Of course, if payments are missed, it digs a deeper hole but if their car was repossessed, that is a bigger no-no and a flag. It may appear on the credit report as “account seriously delinquent status”.

Public Records

A repossession is not just seen as a case of a delay or a missed payment but as a record of the event. Repos are reported in the public records field of credit reports as negative information. Records, which are the public records and forms, constitute ten percent of your total score.

Inquiries & New Credit

If one is in a situation wherein he or she needs to replace the repossessed car and intends to get financing for the new car, then the new financier is going to subject him or her to another credit check. The reason is simple: multiple inquiries and new credit applications within a short timeframe will negatively affect your score by a few points.

Credit Utilization Ratio

If losing a vehicle means not having an active auto loan balance, that is indeed a positive if it was your oldest and or lowest utilization credit account. When that loan is no longer reported on your credit report, it alters the relation between the remaining credit lines and balances. More usage = less value.

Length of Delinquency

Often, a lender will not seize your car the moment you fail to pay for it and you begin missing payments. If you are many months behind your credit delinquency is going to look like you have been for a longer time than your competitor if you are lagging for several months. Longer delinquencies hurt more. However, the severity depends on the duration as well as the recency of the event.

How Long It Takes to Come Off Your Credit Report?

Negative information such as a repo can only remain on your standard credit reports from Equifax, Experian, and TransUnion for a maximum period of 7 years. However, the event will often be less severe in years 6 and 7 than in the first couple of years after the occurrence. Besides, it will be removed from your reports after that period.

You may also pay higher insurance rates for as long as 5 years because of negligence in managing your finances due to a repossession. Some employers may consider your credit report when deciding whether to hire you especially if the job you seek requires dealing with money and this is more so if recently served with a repossession notice.

How to Rebuild Your Credit?

Repossession is not the end of the road as far as credit repair is concerned but it will require some time and hard work. Here are some tips that may help bounce back.

Pay all other accounts – nothing else should be in the arrears.
Reduce credit card balance to decrease credit utilization ratio
If there are any, dispute errors in your credit reports
Credit monitoring alerts or enrollment
Gaining permission to be an authorized user on someone’s account
Reduce the number of credit applications as much as possible
Consult credit counseling services if necessary
Wait until repo remarks disappear from reports

If feasible, attempt bargaining and clearing any balance owed to the lender after they sold the seized automobile. This could at least prevent more unpaid debts from being transferred to collection agencies again. But if you are in a critical situation of having no money to pay back and facing some setbacks, talk with your creditors or consult with a nonprofit credit counseling agency rather than let the situation worsen.

The most important aspect, however, is what happens after the repossession has taken place. Any year you are proven to be well-behaved – as evidenced by paying all other bills on time, maintaining low credit card balances, and avoiding more delinquencies, will help gradually rebuild your credit. Building good habits to handle finances and credit will result in high chances of approval if you need any loans or credit cards later in the future.

Conclusion

It is one of the worst things that can happen to your credit, especially if you had a low credit score before having your car repossessed. However, it is also important to note that it is possible to take steps to rebuild credit over time even after experiencing a hit that can be over 100 points and years of negative effects. Addressing all the items on your credit reports, avoiding new credit applications in the first years after the repo, and living responsibly financially will also reduce the impact somewhat. That is why, while repossession may take several years to cease affecting an individual’s credit reputation, one mistake is not necessarily required to ruin one’s finances if credit repair is done methodically.

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