How Long Does a Car Repossession Hurt Credit?

Credit is hurt by various negative actions. People who stop paying their bills or frequently send in late payments and those who have property seized because of defaults have trouble getting new loans and credit cards. These negative actions all show up on their credit reports. Car repossessions are an example of a harmful item.

Definition

Car loans are secured loans with a vehicle as collateral. The repayment term usually runs up to 60 months or sometimes longer. The Federal Trade Commission (FTC) explains that lenders write default terms in their contracts letting them seize the car if the borrower stops paying. This is called a repossession, and it can happen at any point in the term of the loan, even if they buyer stops sending money after several years of payments.

Effects

Car loans in good standing have a positive effect on credit. FICO, a major credit score company, explains that car loans are part of a person's overall credit payment history. This counts as 35 percent of the FICO score. A repossession is reflected on the credit reports compiled by TransUnion, Equifax and Experian, the three major credit reporting companies. A repossession knocks down the credit score and warns creditors that a major financial obligation was neglected. Car buyers who lose their vehicles to repossession may be denied for other credit or charged very high interest rates on new accounts.

Time Frame

The FTC warns that car repossessions appear on credit reports for seven years. The reporting period begins when the first payment was skipped. Banks, creditors, employers, insurers, landlords and others who pull credit reports to evaluate people for credit, housing, insurance and jobs all see the repossessed car for that entire time. The bureaus automatically purge it from their files when seven years ends.

Considerations

Car repossession is always bad to have on a credit record, but FICO explains that credit is rebuilt over time with positive activity like paying other bills promptly. Most creditors focus on recent accounts and activities and give less weight to old mistakes if current financial records are excellent. Pay all bills by the date due, do not open too many credit accounts, and maintain low balances to offset losing a vehicle in the past.

Prevention

Banks and other car loan providers have no legal obligation to work with financially troubled consumers, but the FTC explains that some will try to do so if the car owner calls and requests help. The lender might allow a late payment or alter the monthly due date so it fits in better with a person's paydays or budget. Bankruptcy stops repossession, according to the FTC, but it negatively impacts credit for three more years than a repossession, as it stays on credit reports for a decade.