How Does a Repo Affect Your Credit?

A repossession occurs when a lender takes back property, such as a vehicle, used as collateral for a secured loan due to the borrower failing to make payments. This action signals a breach of the loan agreement and significantly impacts an individual’s financial standing. Understanding how a repossession affects credit is important for managing financial health.

Credit Report Entries from Repossession

A vehicle repossession leads to multiple negative entries on a credit report. Before the repossession, missed payments are reported as delinquencies.

The repossession event is recorded as a derogatory mark, often listed as “repossession” or “voluntary repossession.” If the lender writes off the remaining debt, the account may be reported as a “charge-off,” signifying the creditor considers the debt a loss. If a deficiency balance is sold to a third-party collector, it can appear as a “collection account.” The original loan account, after repossession, will show a status like “closed” or “charged-off.” These entries remain on a credit report for seven years from the date of the original delinquency that led to the repossession.

Impact on Your Credit Score

A repossession can cause a significant drop in credit scores. Individuals may see their scores decrease by 50 to 150 points or more, depending on their credit history. Both FICO and VantageScore credit scoring models place substantial weight on payment history.

The impact on a credit score is sustained as the repossession remains on the credit report for several years. More recent repossessions have a more pronounced negative effect than older ones. A lower credit score makes it more difficult to qualify for new credit, such as loans or credit cards, and often leads to higher interest rates and less favorable terms.

The Deficiency Balance and Your Credit

After a vehicle is repossessed, the lender typically sells it to recover some of the outstanding loan balance. A “deficiency balance” arises if the sale proceeds do not cover the full amount owed on the loan, including any repossession, storage, and selling costs. For instance, if a borrower owes $12,000 and the vehicle sells for $3,500 with $150 in fees, the deficiency balance would be $8,650.

Lenders commonly pursue collection of this deficiency balance through various means, including direct collection attempts or selling the debt to a collection agency. If the debt is sold, the collection agency may report it as a separate negative entry on the credit report, distinct from the original repossession.

Should collection efforts fail, the lender or collection agency might file a lawsuit to obtain a judgment for the deficiency balance. A court judgment for a deficiency balance is a public record that can appear on a credit report and is highly damaging to credit. Even if the original loan is closed, the deficiency balance can continue to negatively impact credit if it remains unpaid, potentially leading to wage garnishment or liens on other assets if a judgment is obtained.

Monitoring and Correcting Your Credit Report

After a repossession, it is advisable to obtain and review credit reports from the three major credit bureaus: Experian, Equifax, and TransUnion. Federal law provides access to a free credit report from each of these bureaus once every 12 months through AnnualCreditReport.com. It is also possible to access these reports weekly for free.

When reviewing these reports, individuals should carefully examine the account status, payment history, and any collection accounts or public records related to the repossession and any deficiency balance. Look for any discrepancies in dates, amounts, or reporting.

If inaccuracies are found, a dispute can be filed directly with the credit bureau online, by mail, or by phone. The dispute should clearly explain the error and include supporting documentation, such as proof of incorrect reporting. Regularly reviewing credit reports helps ensure accuracy and can assist in identifying potential issues or fraudulent activity early on.