Repossession happens when a lender who gave you a vehicle on credit takes back the car without a court order. It usually happens when you have missed payments. And it is never a good thing for your score.
When a creditor looks at your credit report from a credit bureau, such an event shows up in ways you won’t appreciate.
After a remo has been removed, you can expect your credit score to increase by as much as 100 points. You may gain back the points you lost by also as much as 100 points. Learn how repo affects your credit score and ways you can remove your repo from your credit report.
How Long Will A Repossession Stay On Credit Report?
A repossession record will stay on your credit report for seven years! The 7-year period starts from when you first miss a payment. And your credit score will suffer.
However, the rest of the history of your credit accounts will remain on the credit report. If you have no other missed payment, your account status will be positive. And that positive status will remain on your credit report for 10 years.
How Does Repossession Affect Your Credit Score?
1. Repo is considered derogatory
In your credit report, a derogatory account is one that shows you are seriously past the due date concerning money you owe to a lender.
Usually, it implies that your account is late. You are more likely to have a derogatory account when the information about your late payments has been on your credit report for more than 180 days.
2. May be difficult to qualify for new credit
Because repossession significantly lowers your credit score and causes your account to have the derogatory tag, it tells creditors you are a huge risk. So, it makes it much more difficult for you to qualify for fresh credit.
3. You may be asked to pay higher interest
And if lenders decide to advance you credit, they will do so by charging you much higher interest rates. That’s because these rates are directly proportional to your ability to repay your debts. And they are meant to help them recover as much of the monies they give as possible you in the short term in case you default later on.
Ways to Stop a Repo
Prevention is much better than cure. If you are late to pay your bank or other lenders but repossession of your vehicle hasn’t occurred yet, you need to strategize.
Here are three options that can help you stop repossession and improve your credit score:
1. Ask for deferment
Take the initiative to ask for a deferment of your loan. You should call your lender, explain to them your situation, and ask if you can make lower payments or pause making several payments for a while.
Be sure to inquire whether interest will accrue during this period. Also, find out what will happen concerning the missed payments. Will they be added to the end of the payment period? There may also be fees or penalties associated with this arrangement.
Deferment will give you some time to breathe especially if you have financial difficulties such as the ones caused by the Covid-19 pandemic. It’s a way to buy you some time to try and forestall repossession.
2. Refinance auto loan
The second option is to refinance your auto loan. That means taking on new debt with a different lender, using it to pay off your car, then repaying that debt off.
The new debt should, ideally, have a lower interest rate. This also leads to a lower and more manageable monthly payment that doesn’t put so much of a strain on your budget.
Refinancing enables you to pay off the debt you owe to your initial creditor. It is better to opt for refinancing when your income dips and just before you start paying late that will lower your credit score. Doing so will ensure your car will not be repossessed. And that means such a record won’t show up in your credit report.
3. Sell the car on your own
You can also sell the car you owe payments for if you can no longer afford to keep driving it. To do this successfully, you must ensure you know how much money you owe, then find a seller who can give you that amount or more for your vehicle. Be sure to let your lender know what you are planning to do.
The other alternative is to refinance your car, pay off the car loan, then sell the car to cover the refinancing loan. Even if you don’t get enough money to do so, you will have covered most of your refinancing debt and still have enough time to spare to look for the rest.
How to Remove Repossession from Your Credit Report?
In case you were not able to stop repossession from occurring and showing up in your credit report in the past, don’t worry. You can mitigate the effects of repossession on your financial history.
The following tips can help you:
1. Pay off outstanding debt
If your income situation has improved since repossession, use that extra money to start paying off outstanding debt. The average American has a personal debt of $90,460. This kind of debt is best attacked in smaller steps.
It helps to list down all your debts in ascending order. Then start by paying off the smaller debts. Use the money you free up after that to tackle the next debt; lather, rinse, repeat.
2. Pay your bills on time
Always pay your bills on time. You can use a credit card to establish a positive credit history and increase your score. Then pay off your credit card debt on time, every time. Don’t let your bills accrue to become unmanageable debts. The longer your debt repayment streak, the better your score will be.
3. Dispute credit report inaccuracies
Always pay attention to your credit reports. Be sure to check what they show line-by-line so that you can dispute any inaccuracies that are lowering your score. Collect the paperwork that proves otherwise and follow up on the matter until it’s solved. Do this by contacting both the reporting institution and the credit reporting company.
4. Drop your credit utilization ratio
Credit utilization ratio (CRU) refers to the revolving credit you use currently divided by the total revolving credit you have available. It shows how much you owe compared to your credit limit.
The higher this ratio is, the more debt you have. And lower your credit score will be. You should, therefore, work hard to drop your CRU. Do your best to keep it below 30%. But you would be better off if you can drop it much further to 5% or less.
5. If you cannot wait for 7 years, you can hire a credit repair company
If you are unwilling to bear having the repossession record on your credit history for 7 years, it’s wise to hire a credit repair company. The credit repair company will work on your behalf to challenge the negative records. Then they can be removed from your records.
Repossessions should be avoided where possible. They lower your credit score and complicate your life as a borrower. But when they occur, learn how to mitigate the effects of such negative events from your credit reports. Then hire a credit repair company to help you get repos removed from your financial history.