How Does a Repossession Effect Your Credit?

When someone wants to obtain a car, boat or lawnmower, they often seek assistance from a financial institution or bank. The lender gives them the money to cash out the item with a store or previous owner. Once a loan is obtained, a lien is typically placed on the property until the balance is paid in full. Monthly payments are usually set out to manage the loan amount over an extended period of months or years. A repossession occurs when a vehicle or personal item that is originally owned by the bank is returned to the bank and no longer in possession of borrower. This happens when the borrower falls behind on payments and is unable to meet the terms of the loan. In order for a repossession to take effect, approval from the bank and even a judge needs to take place first. When an actual repossession occurs, someone hired by the bank locates the property and physically removes it from the borrower's possession.

Falling more than 30 days behind on a revolving credit such as a car or boat loan will begin to adversely affect credit. Once payments are 90 days or more behind and not paid, default has occurred on the terms of loan making the entire amount due and payable immediately. Once the payment is over 30 days past due, it is reported to all three credit reporting agencies: Experian, Equifax and TransUnion. From the three credit reporting agencies, a credit score is calculated. This credit score is often times called a FICO score. A good credit score is considered anything above 650. For someone who is facing a repossession, the credit score drops significantly, sometimes well under the 400 range. With a low credit score it is very difficult to obtain a new line of credit for a credit card, revolving credit, vehicle loan or home loan.

After a vehicle or personal item has been repossessed by the bank, the first thing that should be done is to work on improving the credit score. The first step is pulling a merged credit report of all three agencies and making sure that there are no other delinquencies or negative credit marks on the report. Once everything has been shown that it is paid in full and there is no outstanding balance remaining, the borrower can begin to repair the credit score. One way to do this is by obtaining a secured credit card. A secured credit card often requires anywhere from 10% to the full amount down. Credit is given based on the amount deposited. Making payments on time for 6 to 12 months will begin to slowly improve a credit score. Making sure that no accounts go into collection and no vehicles are repossessed will contribute greatly toward a higher score. This will also help with the ability to rebuild and regain credit worthiness.