How a Car Repo Affects Your Credit

We use cars almost every day to get to work, make it to the grocery store, or visit family and friends. But if you’ve financed your car, you don’t actually own it — the lender does. And if you stop making your monthly payments, the lender can repossess it and sell it to recoup the amount you owe them.

Not only does a car repossession leave you without your primary source of transportation, but it can also hurt your credit. So how does a repossession affect your credit? If you've recently had a car repossessed, here's what you need to know.

What a car repossession does to your credit score

When does a repossession show on your credit and how does it affect it? Depending on how long you've been delinquent on the account, your credit score may have already suffered some loss. But that can compound when a vehicle repossession hits because it signifies that you've defaulted on the car loan and the creditor gave up trying to collect monthly payments from you.

While it’s impossible to say exactly how much your credit score will drop after a repossession — credit scoring models use several factors — you will likely see a large decline.

Once added to your credit report, an involuntary repossession will remain on your credit report for seven years after your first missed car payment that ultimately led to the vehicle repossession.

That doesn’t mean your credit score will stay low that whole time, however. Credit scoring models favor new information over old, so if you develop and practice good credit habits going forward, that positive information can help your credit score get back on track.

And remember, involuntary repossession doesn't necessarily mean you won't be off the hook with payments, especially if the lender doesn't get enough from the auction sale to satisfy the debt.

“I have had a client who owed five more payments,” says Jeanne Kelly, a credit coach. “But after the car was repossessed and sold at auction she owed thousands of dollars more than those payments.”

What if I voluntarily surrender the vehicle?

If you know that the lender is planning to come and take the vehicle, you have the option to voluntarily surrender it instead. If you do this, it will show up as a voluntary surrender instead of a repossession on your credit report.

This voluntary repossession can work out in your favor because it shows that you're working with the lender to recuperate what you owe instead of burning bridges. That said, the core problem of not paying the debt as agreed remains, and it may not be that much better in terms of your credit score.

Will reinstating the car loan remove the repossession?

In some cases, you may be able to talk the lender into reinstating your auto loan and returning your vehicle. Typically, this will require that you get the account current immediately, plus pay some or all of the cost of repossessing the car.

While this will get you your car back, though, it won’t remove the repossession from your credit report, and may not help your credit score in the short term.

That said, a reinstatement will likely look a lot better to future lenders than an outstanding repossession, so it’s still worth considering if you can make it work.

Is there any other way to get a repossession removed?

While you’ll typically need to wait seven years for a repossession to fall off your report naturally, it is possible in some situations to get it removed sooner.

More commonly, you may be able to accomplish removal if the repossession was invalid or unfair. If this happens, you can dispute it with the three national credit bureaus, Experian, Equifax, and TransUnion.

Keep in mind, though, that the lender will have the chance to respond to your dispute. So make sure you have evidence to back up your claim.

The other way to get a repossession removed from your credit report is to work directly with the lender. If you can manage to negotiate with the lender on the payment terms, you can also request that they remove the negative item from your report.

In this situation, it’s entirely at the lender’s discretion to do so. If they do it, your credit score will bounce back. But if not, you will need to focus on other ways to rehabilitate your credit.

How to rebuild your credit after a repossession

If you’ve recently had a car repossessed and weren’t able to negotiate a removal, Kelly recommends avoiding walking away from your credit. “It is also good to keep building new accounts to add new healthy credit,” she adds. A secured credit card or a credit builder account can help with this.

It may take time to get your credit back in shape. To help, here are some tips:

• Establish a positive payment history: Your car payment history makes up 35% of your FICO score, so it's crucial that you pay your bills on time and avoid any late payments or missed payments going forward. You can do this by setting up automatic payments and avoiding taking on unnecessary debt.
• Keep credit card balances low: If you have credit cards, a high balance can signify that you’re overburdened with debt. Work on paying down your credit card debt and keep your balance low going forward. Some credit experts recommend keeping your balance below 30% of your credit limit, but there’s no hard-and-fast rule — the lower, the better.
• Avoid applying for a lot of credit in a short period: Every time you apply for a loan or credit card, the loan company will perform a hard inquiry on your credit report. Alone, each inquiry will only knock a few points off your score. But that can compound if you apply for multiple loans and credit cards in a short period. The only exception is if you’re rate shopping for one loan in a 45-day period — in this scenario, only one credit inquiry will count against you.

Above all, be patient. Rebuilding credit can take time, but the effort is worth it.

More about cars and credit

• Pros and cons of paying off a car loan early
• What's a good credit score to buy a car
• How to get a car loan with bad credit
• How fast will a car loan affect my credit score
• Does refinancing a car hurt your credit?
• How to refinance a car loan when you have bad credit
• How to get out of a car loan
• Pros and cons of buy here pay here car dealerships
• Getting a car loan after bankruptcy
• How to get a car loan
• The cost of electric vehicles vs. gas cars by state

About the Author

Ben Luthi is a personal finance writer with a degree in finance who was previously a staff writer for NerdWallet and Student Loan Hero. See Ben on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.