How Does Repossession Affect Your Credit?

Missing as few as two payments in a row could give a lender the legal right to take back property -- called repossession -- and probably severely damage your credit rating in the process. The importance of a repossession in determining your credit ratings diminishes over time, and you can get some of those points back by focusing on handling your other loans responsibly.

Impact

Negative items on your report that show a complete inability to pay, such as foreclosure and repossession, but fall short of bankruptcy lower your credit score by 85 to 160 points, according to CNN. The impact on your credit score, however, usually is less significant than the fact that you have a repossession on your report. Lenders view repossession as an egregious lack of responsibility, especially if the repossession happened recently.

Time Frame

A repossession affects your credit score for seven years, according to Bankrate. The FICO scoring model, however, gives less weight to items as time passes. A repossession has the greatest impact on your credit score during the first year or two after the incident and the least impact in year seven.

Voluntary Repossession

The credit scoring formula does not consider whether you give up your property voluntarily or the lender forces a repossession. Voluntary repossession only benefits you financially, because lower administrative fees are charged to get the property back. Keep in mind that you can still have an outstanding balance after a repossession if the car does not sell for the amount left on the loan. If you cannot pay the balance, the lender can obtain a public judgment, which further damages your credit.

Tip

Lenders might be willing to let you defer payments for a few months if you explain your hardship, such as losing a job or having medical bills. You could try to work out a revised payment plan based on your income. If the repossession has already occurred, you may try to work on other areas of your credit report to mitigate the damage. You should pay your other debt bills on time and try to eliminate existing credit card debt.