How Does a Car Repossession Affect Credit?

Dear MES,

Having a vehicle repossessed will likely have a substantially negative impact on your friend's credit history.

If your friend's car is about to be repossessed, her credit is likely already being affected. Before a car is repossessed, the borrower has to default on the loan. If your friend hasn't been making loan payments for some time, those delinquencies are probably already appearing in her credit history and factoring into her credit scores.

Once the car is taken back, the lender will update the account to show it has been repossessed, which is yet another derogatory mark that has additional impact on credit scores. How great the impact will be, and how long it will take to recover and rebuild her scores afterwards, will depend at least partially on the rest of your friend's credit history.

How Much Will a Repossession Impact Credit Scores?

While a repossession is considered derogatory for everyone, it's hard to predict how much an individual's credit scores will decrease as a result. There are many different credit scoring models available, and each one may have its own scale and criteria.

How much a credit score will be impacted also depends on each individual's unique credit history, such as whether all of their other accounts are in good standing.

Although the exact number of points may vary, having a repossession on your credit report can make it difficult to qualify for new loans or credit cards in the near term. For that reason, it's best for anyone facing a vehicle repossession to contact their lender and ask if arrangements can be made to get caught up.

You May Still Owe a Balance After Repossession

Once a vehicle is repossessed, the lender will sell it to recoup the balance on the loan. If the vehicle is sold for less than the amount still owed on the loan, your friend will be responsible for the difference.

If left unpaid, the lender may then sell the remaining balance to a collection agency, and that collection account may be reported as a separate account on the credit report. Although the open date on the account will show the date it was sold to the collection agency, the account will be removed at the same time as the original account: seven years from the original delinquency date that led up to the repossession.

If the lender decides to forgive the remaining balance, your friend may receive a 1099 tax form. This means the amount forgiven will be treated as income for tax purposes, and the federal government will require that taxes be paid on the forgiven amount.

Rebuilding Your Credit After Repossession

It's always best to contact your lender prior to repossession to explain your situation and ask if there are any other options available to you. Especially now during the COVID-19 pandemic, some lenders may be able to offer accommodations that could help your friend avoid falling behind on her payments.

However, if they are unable to avoid the repossession, they may be wondering what steps they can take to begin rebuilding their credit history afterwards. Here are some tips:

• Bring any other past-due accounts current. Your payment history is the most important factor in your credit scores, so bringing any past-due accounts current is the first step to rehabilitating your credit.
• Reduce credit card balances. Your credit utilization ratio, or balance-to-limit ratio, is the second most important factor in credit scores. Paying off or paying down credit card balances can help increase your scores.
• Make all payments on time. Going forward, make sure all your payments are made on time, every time.
• Add your utility, telecom and streaming service payments. With Experian Boost^®ø, you can increase your score by having Experian add your on-time payments for utility, telecom and certain streaming service bills going back as far as 24 months.
• Get your free Experian credit score. When you order your free score from Experian, you will also get a list of the risk factors that are impacting you the most at that moment. Knowing these factors will help you understand what changes you can make to increase your scores.

Thanks for asking.
Jennifer White, Consumer Education Specialist