How Repo Hurts Your Credit & How to Fix it

The Federal Trade Commission (FTC) warns consumers that a good credit rating is essential to qualify for loans, insurance and even some jobs. A top-notch credit score requires a good payment history on all bills. Sometimes vehicle owners miss payments, which puts them at risk for repossession and major credit rating harm.

Definition

• A repossession is an action in which a bank or other lender seizes a car or other vehicle if a person stops making payments. The FTC explains that loan contracts typically contain a provision that allows seizure of the vehicle without any court action or advance warning.

Process

• The FTC advises that most states have laws granting repossessors the right to seize a vehicle at any time, without notice, once the owner defaults on the payments. They can even come on private property to do it, although they are usually barred from making physical threats, using force and committing a "breach of the peace." They must return any personal property that was in the vehicle.

Effects

• Repossessions lower a person's credit rating, according to major credit score provider Fair Isaac Corporation (FICO). They represent a bill that the person was unable to pay, which makes other lenders reluctant to approve new applications. A repossessed vehicle appears on credit reports for seven years.

  Banks sell repossessed vehicles and expect former owners to pay any difference between the sale price and outstanding loan balance. The FTC explains that they can sue for the money, further harming the former car owner's credit report. The burden of paying can make a person delinquent on other payments, which also lowers the credit score.

Solution

• The FTC says that some lenders work with customers who call them before defaulting. They may allow a late payment or change the due date. Delinquent payments hurt the credit score, according to FICO, but not nearly as much as a repossession.

  Once vehicles are reclaimed, the consumers can only fix their credit by being diligent with other accounts. FICO explains that it puts the most weight on on-time payments, so catch up any other late bills and make all future payments on time. Do not get new loans or charge cards unless absolutely necessary, to keep the total debt down. Creditors focus more on recent records, so they may overlook the repossession if it is at least a year in the past and all other accounts are in good standing.

Considerations

• Occasionally consumers can remove legitimate repossessions from their credit records. Any items with inaccuracies can be disputed, according to the FTC. Get TransUnion, Experian and Equifax credit report copies from annualcreditreport.com, which provides them annually free of charge, and scrutinize the repossession entries. There may be slight mistakes in dates or other details. Mail a complaint letter or fill out an online dispute form with all the credit bureaus. Divorcenet, a legal advice website, explains that the bureaus do not always investigate challenged information within the 30 days allowed by law, and creditors do not always respond to validation requests. If there is no investigation or validation, the repossession is erased.