Saturday, August 21, 2010

What Happens to Your Credit Score After a Repo?

Credit scores provide a numerical indicator to reflect whether an applicant has honored creditor-based agreements and for predicting future risk levels. After an auto repossession, your credit score could trend toward a lower range, as your payment history is used for 35 percent of a credit score calculation. You can resolve the debt that stems from an auto repossession, while taking action toward improving your credit score.

Auto Financing

    Auto financing could position an applicant to buy a vehicle with minimal cash out of pocket. Based on an applicant's credit strength, an auto lender can determine the down payment requirements and other loan terms. If you have paid prior auto loans as agreed, as well as other creditors, you might qualify for favorable financing terms.

Repossession

    An auto repossession generally results after a borrower defaults on a financing agreement. Typically, a finance company will send several notices to remind a borrower about missed loan payments and to mention any late payment fees. Collections efforts are increased, as a borrower can expect to receive phone calls and certified mail about the past-due balance. If a borrower fails to make payment arrangements and ignores collections efforts, an auto lender might hire a towing company to repossess the vehicle. To redeem the vehicle, a borrower must pay past-due amounts, late fees, storage fees and towing costs before regaining the vehicle. Repossession laws vary by state, but if the period of past-due payment is prolonged, a lender might auction the vehicle to recoup some of the investment.

Credit Impact

    Favorable credit experiences, such as loan payments that are made on time, low credit card balances and few inquiries for the extension of new credit, improve credit scores and could position a borrower for attractive financing. However, an auto repossession typically hurts a borrower's credit rating and credit score. Slow bill payments detract from a credit score, and a default on a home loan or an auto loan hurts a consumer's credit rating and credit score even more. Your credit score may be harmed with the bureau where your auto lender reports the information, as the result of a repossession. Some auto lenders report to either Equifax, TransUnion or Experian, while others report payment experiences to all three bureaus.

Considerations

    If you've had a recent auto repossession, you'll probably have more difficulty procuring an auto loan under favorable terms. Your credit report will reflect a negative rating from your former auto lender, as well as a vehicle repossession. To remedy the amount in arrears, you can make arrangements with the lender to pay off the debt. Paying your current bills as agreed could help increase your credit score over time.

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