How does repossession 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. 

Repossession can show up on credit reports and impact credit, but it won’t stick around forever. 

Key takeaways

• A repossession can result in a derogatory mark on credit reports, which can stay on the 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 and doing things like paying your monthly statement on time every month.

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—like a car, appliance or home—that’s purchased with credit. 

There are two kinds of repossession:

• Involuntary: In an involuntary repossession, the lender typically uses a repossession specialist to take the property when the buyer defaults on the loan.
• Voluntary: In a voluntary repossession, the borrower gives up the property to avoid an involuntary repossession and the extra cost that comes with it.

The lender may either keep the repossessed item or sell it to recover at least some of the loan balance. The borrower might still owe money after the repossession if the lender doesn’t recover enough. 

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. For example, 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. 

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 personal 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. These negative marks can be caused by:

• 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®. 

But 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.

And keep in mind that lenders might take legal action too. Although court judgments no longer appear on credit reports or factor into 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, you could contact each lender to discuss your options. Bringing those accounts current could improve your scores over time. 
• Don’t max out credit cards. The Consumer Financial Protection Bureau (CFPB) says that 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 of your credit scores—counting for 35% of your FICO® score. The CFPB says paying each bill on time, every time, can help get your scores back on track.
• Only apply for the credit you need. Avoid applying for a lot of credit in a short period of time. Doing so could cause your credit scores to drop. 
• Monitor your credit. Regularly check your credit reports for any errors, which could lower your scores. If you find a mistake, you can dispute it with the proper credit-reporting bureau. 

If you’re having trouble getting approved for credit, you might be able to use a secured credit card or credit-builder loan to rebuild your credit after a repossession. Using these types of loans responsibly by staying within your credit limits and paying statements on time could do just that. 

Repossession of a car or other personal property can impact credit for a number of years. But it won’t last forever. A repossession typically stays on credit reports for seven years. However, you can take steps to improve your credit before the seven-year period ends. 

Making consistent smart financial decisions over time, such as responsibly using credit cards, can help steer your credit in the right direction. You could also monitor your credit with tools like CreditWise from Capital One. It’s free to use whether you’re a Capital One customer or not, and using it won’t impact your credit scores. 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.