What is repossession, and how does it impact your credit?

When you buy a car or other property, it’s hard to imagine giving it up. But when it comes to secured loans and collateral, it’s one possibility if you fall behind on payments. 

If you find yourself facing repossession, it can be helpful to understand what it is, how it works and the impact it can have on your credit. 

What you’ll learn: 

• A repossession can result in a derogatory mark on credit reports for up to seven years. 

• It’s hard to know exactly how much a repossession will affect credit scores because credit-scoring companies use different scoring models. 

• There are two types of repossession: voluntary and involuntary. A voluntary repossession could result in the borrower paying less in fees.

• There are ways to rebuild credit after a repossession, including using credit responsibly by doing things like paying your monthly statements on time.

Repossession occurs when a debtor defaults on a loan and the creditor takes back the financed collateral. Repossession might happen when a borrower fails to make payments on personal property, such as a car, appliance or home.

There are two kinds of repossession:

• Involuntary: In an involuntary repossession, the lender typically uses a repossession specialist to take the property when the borrower defaults on the loan, resulting in additional fees.

• Voluntary: In a voluntary repossession, the borrower gives up the property to avoid an involuntary repossession and the extra cost that comes with it.

When you have something repossessed, the lender may either keep the repossessed item or sell it to recover at least some of the loan balance. You might still owe money after the repossession if the lender doesn’t recover enough. Some states allow the lender to sue the borrower to collect the debt. You can contact your state attorney general to learn more.

How soon repossession happens after a missed payment could depend on the lender, the product that’s financed and the state in which you live. The Federal Trade Commission (FTC) says there are several states where a lender can repossess a car as soon as the borrower defaults on their loan. But the FTC also says that lenders may offer borrowers ways to bring the account current and avoid repossession.

Keeping up with payments is ideal. But if you’re not able to, you might be able to stop a repossession and keep your property if you contact your lender as early as possible. Your lender may be able to work with you on a repayment plan, change your payment schedule or revise part of your contract.

If your property is repossessed, your lender could report this information to the credit bureaus, and it could show up as a derogatory mark on your credit reports. That might be in addition to other negative marks related to:  

• Late payments: A lender can report a late payment to the credit bureaus, which can impact your payment history and, in turn, your credit scores.

• Loan default: If you default on a loan, such as a car loan, it could also leave a negative mark on your credit reports. Loan defaults can stay on reports for up to seven years. 

• Collections: If there’s still a balance after the lender sells your repossessed property and you don’t pay it, they could turn the account over to collections. 

Credit-scoring companies use the information from your credit reports to calculate credit scores. So credit scores could drop from the repossession itself and from related events that impact payment history. That’s because payment history is an important factor in calculating your credit scores from both FICO® and VantageScore®.

It’s hard to determine the exact impact a repossession can have on credit scores. That’s because it can depend on several factors, including which credit bureau provided the information and which credit-scoring model was used in the calculation.

Lenders might take legal action too. Although court judgments no longer appear on credit reports or affect your credit scores, they’re still part of the public record. If a lender looks up your public records, this could make it harder to qualify for future loans.

A repossession can stay on credit reports for up to seven years. According to Experian®, the seven-year countdown starts on the date of the first missed payment that triggered the repossession. But Experian says that once that time period ends, they’ll automatically remove the account from your credit report.

Improving your credit after a repossession won’t happen overnight. But there are steps you can take right away to start rebuilding your credit.

• Pay off overdue bills. If you have other overdue accounts, bringing those accounts current could improve your scores over time. 

• Don’t max out credit cards. The Consumer Financial Protection Bureau (CFPB) says keeping credit card balances low can help scores. The CFPB suggests aiming for a credit utilization ratio below 30%. 

• Make on-time payments. Payment history is one of the most important factors in your credit scores—counting for 35% of your FICO score. The CFPB says avoiding late payments can help get your scores back on track.

• Only apply for the credit you need. Applying for a lot of credit in a short time could cause your credit scores to drop. 

• Monitor your credit. You can monitor your credit by visiting AnnualCreditReport.com or with tools like CreditWise from Capital One. CreditWise is free to use, whether you’re a Capital One customer or not, and using it won’t impact your credit scores. If you find an error, you can dispute it with the credit bureau that reported it.

Repossession is when a lender takes back collateral as a result of nonpayment. Repossession of a car or other personal property can impact credit, but it won’t last forever. And while a repossession typically stays on credit reports for seven years, you can take steps to improve your credit before the seven-year period ends.

You can track your credit with a tool like CreditWise. Capital One also offers credit cards for building credit. If you feel like a credit card is right for your situation, you could use one responsibly to build your credit. That means doing things like paying your statements on time every month. 

Making consistent smart financial decisions over time, such as responsibly using credit cards, can help steer your credit in the right direction. In addition to monitoring your credit reports, you could explore cards for building credit to see if there’s one that’s right for you.