Rebuilding Your Credit After a Car Repossession[yoast-breadcrumb]
Rebuilding Your Credit After a Car Repossession
Having your car repossessed can be an incredibly stressful and challenging experience. Not only have you lost your vehicle, but you now have to figure out how to rebuild your credit so you can qualify for future loans and credit products. The good news is, it is possible to bounce back from a repossession if you take the right steps.
In this article, we’ll walk through everything you need to know about rebuilding your credit after your car was repossessed. We’ll cover how repossession impacts your credit, creating a game plan for credit repair, disputing errors on your credit report, negotiating with creditors, and much more. By the end, you’ll have a clear roadmap to follow so you can start improving your credit right away.
How Repossession Impacts Your Credit
When your car is repossessed, it damages your credit in a few key ways:
- Late payments – Any late or missed payments leading up to the repossession will show up on your credit report and hurt your credit score.
- Default – The lender will report the default from the repossession, indicating you failed to pay the debt as agreed. This can hurt your score even more than the late payments.
- Collections – If there’s still a balance left on the loan after the repossession, it may be sent to collections. Having an account in collections severely damages credit scores.
According to credit bureau Experian, a repossession can deduct 50 to 150 points from your credit score. For example, if your score was 700 before the repossession, it could drop into the 550 range afterwards.
The repossession and related negative information will stay on your credit report for up to 7 years from the date of your first missed payment. However, you can start rebuilding your credit right away, it will just take time for the impact to lessen.
Create a Game Plan for Rebuilding Credit
Improving your credit after a repossession requires patience and discipline. Here are some steps to focus on:
- Review credit reports and dispute errors – Make sure information is reported accurately.
- Bring accounts current and pay bills on time – Payment history is critical.
- Pay down balances and lower utilization – Having high balances hurts scores.
- Hold off new credit – New inquiries and young accounts can lower scores initially.
- Consider an alternative vehicle – Buy a beater in cash or use other transportation.
- Save money and build emergency fund – Financial cushion helps avoid future issues.
- Explore credit-builder products – Can help establish positive payment patterns.
The journey will take time, but staying focused on these key areas will help you make steady progress. Expect setbacks and don’t get discouraged – perseverance is key.
Review Credit Reports and Dispute Errors
The first step is to check your credit reports from Experian, Equifax and TransUnion. You can access free copies of your reports at AnnualCreditReport.com. This will allow you to verify the repossession and related information is being reported accurately.
If you spot any errors or outdated information, file disputes with the credit bureaus to get the issues corrected or removed. This is an important rights consumers have under the Fair Credit Reporting Act. Be sure to provide documentation to support your dispute.
For example, if the date of first delinquency or repossession is wrong, send proof of when you actually first missed a payment. If the outstanding balance is incorrect, include a statement showing the correct amount.
Bring Accounts Current and Improve Payment History
Since payment history makes up a major part of your credit score, bringing accounts current and making timely payments going forward is critical. If you have any other late or past-due accounts, focus on bringing them up to date and maintaining perfect payment records.
You may need to make some sacrifices to come up with the money, like cutting discretionary spending, taking on a side gig, or temporarily lowering 401k contributions. But catching up on payments can start the process of rebuilding trust with creditors.
Be sure to pay all bills – not just credit accounts – on time each month. Utility payments, rent, cell phone bills and other recurring expenses all matter. Consider setting up automatic payments or alerts to avoid any late payments.
Pay Down Balances and Lower Utilization
Your credit utilization ratio – how much of your available credit you’re using – is another key factor in credit scores. Maxing out cards or having high balances can negatively impact your credit.
Try your best to pay down existing balances, and lower your overall utilization. Getting balances down to 30% or less of your credit limits can help improve your credit score over time. You may need to cut expenses temporarily to free up cash for debt payments.
Additionally, avoid running up card balances again once they are paid down. Keep usage low on a consistent basis, not just right before applying for credit.
Hold Off on New Credit Initially
It can be tempting to apply for new credit soon after a repossession to get your finances back on track. However, new credit inquiries and opening new accounts can sometimes lower your scores initially.
Try to hold off on applying for new credit – especially major loans – for 6 months to a year after the repossession. Instead, focus on improving your credit fundamentals first.
If you absolutely need a vehicle in the meantime, consider buying an inexpensive used car with cash or using other transportation options. You can revisit financing a car once your credit is in better shape.
Consider Credit-Builder Products
One strategy that can help start rebuilding credit is to open a credit-builder product like a credit-builder loan or secured credit card. These are designed for people trying to establish or rebuild credit.
A credit-builder loan lets you make payments into a locked savings account, and the bank reports the payments to the credit bureaus. Over time, this builds positive payment history. Secured cards work similarly, and help establish responsible account management.
Opening a credit-builder product can be useful, but go slowly and let your credit fundamentals improve first. Applying for too much credit at once can overwhelm your reports initially.
Negotiate with Your Lender
It’s possible you may be able to negotiate with your auto lender, even after a repossession occurs. This won’t remove the repossession from your credit report, but may help limit the damage.
For example, you may be able to negotiate a settlement for less than the full balance you owe. This reduces the amount that could potentially go to collections. Settling can require a lump-sum payment, so save up if that’s the route you want to take.
Alternatively, you may be able to voluntarily surrender the vehicle and negotiate a lower deficiency balance. This involves signing the title over to the lender, and settling on an amount you still owe.
If negotiations aren’t successful, be sure to keep making payments if the lender sends the remaining balance to collections. Otherwise, it will continue hurting your credit.
Build Up Savings
Another important step is to build some savings so you have a financial cushion. This way you can avoid ending up in a similar tough spot in the future if an unexpected expense comes up.
Try to set aside even small amounts of money each month into an emergency fund. Cut back on discretionary spending like dining out or entertainment in order to save more cash.
Having savings buys you more time if money gets tight again. You can tap the emergency fund to cover bills instead of missing payments and impacting your credit.
Take Other Steps to Rebuild Credit
Here are a few other tips that can help in rebuilding your credit after repossession:
- Avoid applying for new loans or credit cards initially
- Don’t close old credit accounts as it can lower your credit limits
- Ask creditors for credit limit increases after some time goes by
- Become an authorized user on someone else’s credit card if possible
- Limit credit checks by only applying for what you need
Monitor Your Progress
As you work on rebuilding your credit, it’s important to monitor your progress so you can see the impact of your efforts. Here are some tips for tracking your credit recovery:
- Check your credit reports from each bureau every few months
- Use a free service like Credit Karma to monitor your credit scores
- Review credit factors like utilization and payment history
- Set reminders to check in on your credit
- Celebrate progress and milestones as your scores improve
Staying on top of your credit will help you understand if your rebuild strategy is working, and what areas still need more focus. It takes diligence, but you can rebuild your credit after repossession.