Does Totaling a Car Affect Your Credit?

When a vehicle is extensively damaged and the cost of repairs surpasses its actual cash value, it is declared “totaled” or a “total loss.” This article clarifies the potential effects a totaled car can have on your credit.

How a Total Loss Directly Impacts Your Credit Report

The occurrence of a car being totaled does not directly appear on a credit report. Credit reports are financial records that track accounts, payment histories, and borrowing activities. They document your relationships with lenders and creditors. The physical status of your vehicle or the specifics of an insurance claim are not part of your credit history.

Credit implications from a totaled vehicle are indirect. Your credit report reflects your financial behavior, not the incident itself. If the event leads to financial strain that affects your ability to meet other payment deadlines, those missed payments are reported.

Dealing with Your Auto Loan After a Total Loss

If your totaled vehicle has an outstanding loan, the insurance payout for the car’s actual cash value is sent directly to your lender. This payment is intended to settle the remaining loan balance. However, a common situation arises when the insurance payout is less than the amount you still owe on the loan, creating what is known as a “deficiency balance.”

You remain responsible for paying the difference to the lender. Failing to pay this amount can lead to negative consequences for your credit. The lender may report late payments to credit bureaus, which can reduce your credit score, as payment history is a primary factor in credit scoring. Continued non-payment could result in the account being sent to collections, or even charged off by the lender as an uncollectible debt.

Both collections and charge-offs remain on your credit report for up to seven years and can damage your ability to obtain future credit. To mitigate the risk of a deficiency balance, Guaranteed Asset Protection (GAP) insurance can be helpful. GAP insurance covers the financial “gap” between the vehicle’s actual cash value paid by your primary insurer and the remaining loan balance. It is also important to continue making your regular loan payments even after the car is totaled until the loan is fully settled, to avoid any negative marks on your credit report.

Credit Considerations for Your Next Vehicle

When you apply for a new auto loan to replace a totaled vehicle, lenders will perform a hard inquiry on your credit report. This inquiry can cause a small, temporary dip in your credit score, usually by about five to ten points. While hard inquiries remain on your credit report for up to two years, their impact on your score often diminishes after about twelve months.

Securing a new loan also influences your credit mix and the average age of your accounts. A new, relatively young loan can slightly lower the average age of your credit accounts, which is a factor in credit scoring models. Before applying for new credit, it is advisable to obtain a copy of your credit report to understand your current financial standing.

This allows you to identify any inaccuracies and assess your creditworthiness. Lenders also consider your debt-to-income (DTI) ratio when evaluating new loan applications. This ratio compares your monthly debt payments to your gross monthly income. A lower DTI ratio generally indicates a greater ability to manage additional debt, which can be favorable for loan approval and terms.