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If you have a car loan, the lender holds the vehicle title as collateral. If you fall behind on the payments, the lender may reclaim the vehicle.
A repossession will usually act as a devastating force on your credit score. We will explain some of the best remedial strategies for your credit following repossession.
How To Fix Credit After a Car Repossession
When considering how to fix your credit, it is first important to understand the factors involved. The following outlines the FICO model.
The FICO scoring model uses the following factors:
- Payment History (35%): This single factor is your history or track record of past credit use. Lenders know how past behavior often indicates future outcomes.
- Amounts Owed (30%): This second most critical factor involves your overall amount of debt and your credit utilization ratio. This is a percentage. It measures the current revolving debt being used relative to the overall amount (maximum) available limits.
- Length of Credit History (15%): Lenders prefer a multi-year history of managing credit accounts.
- Credit Mix (10%): Consumers should demonstrate creditworthiness with two or more types of accounts. Examples include installment loans or revolving accounts such as credit cards.
- New Credit (10%): Having many recent “hard inquiries” often indicates some unexpected financial problems exist. Don’t apply for too many new credit accounts in a short time.
Pay Overdue Bills
The single greatest factor influencing your score is your payment history. Your track record of credit-related behavior is a leading indicator of future performance.
Missing or late payments are very detrimental. Consumers seeking good credit must focus on consistently making the required payments on all accounts.
Remember that most negative credit entries no longer appear on your report after seven years–regardless of if it is paid or unpaid.
Decrease Credit Utilization
VantageScore 4.0 separates credit utilization rates as an independent factor. Yet, FICO includes utilization rates within their “amounts owed” factor, which represents about 30% overall.
Having too much debt can create challenges in satisfying all your financial obligations. How much is too much? One key metric is your debt-to-income ratio.
When too much of your monthly income goes toward debt, you are susceptible to problems. Unforeseen financial calamities arise such as job loss, illness, or divorce.
To qualify for many conventional mortgage loans, debt-to-income ratios should remain below 45%. Your credit utilization rate is a similar metric.
Expressed as a percentage, your credit utilization rates focus on revolving credit accounts. Revolving accounts are primarily credit cards. The formula is as follows:
Credit Utilization Ratio (%) = total amount of debt (owed) / total credit limit (available credit)
A “good” utilization rate is typically considered below 30%. An excellent utilization rate is anything below 10%.
Pay Your Bills on Time
Moving forward, pay all your credit accounts before their due dates. Otherwise, even the best credit improvement strategies will fail. As a reminder, credit scoring models generally place greater emphasis on new entries.
Many reporting services in the market today will assist you with alternative account options. For example, you can report your monthly rent and utility payments. All three credit bureaus now will include this information if properly reported.
Use automatic payment options when available to avoid future late payments. This ensures that the funds from your checking account are electronically sent.
Both the FICO and VantageScore models value consistency when assessing creditworthiness.
Credit Builder Loan
One effective option for improving your credit is obtaining a credit-builder loan. A credit-builder loan might benefit your credit score by improving several of the factors used in FICO calculations.
For example, improving your payment history, length of credit history, credit mix, and more.
It is an installment loan offered by many local banks, credit unions, and online lenders. With a credit builder loan, the loan funds remain in a secured savings account.
The borrower makes fixed monthly payments toward the balance. Throughout the repayment term, the lender regularly reports all activity to the primary credit bureaus.
Most consumers experience a steady increase in their credit scores with these options. Once “repaid” in full, the original funds in the savings account are available to the borrower.
Get a Secured Credit Card
Another credit repair or improvement option involves establishing a secured credit card. Unlike a traditional unsecured credit card, secured credit cards require a security deposit.
The security deposit is typically a requirement for approval. The security deposit amount is usually equal to the secured card’s credit limit.
After obtaining the secured credit card, cardholders should use the card regularly. This involves making purchases as you would with a regular credit card.
Obviously, the key is making timely repayments of the debt. Once you show a responsible pattern of use, cardholders usually will qualify for an unsecured card. From start to finish, expect this process to take roughly one year.
How Long Does it Take to Fix Your Credit After a Repossession?
Regardless of your strategy, reviewing a current copy of your credit report is the best first step. Without doing so, it is difficult to accurately assess your status or track any progress.
According to the Consumer Financial Protection Bureau, consumers may get a free credit report every 12 months. This applies to the three credit bureaus, Equifax, Experian, and TransUnion. These free credit reports do not typically include credit scores.
Consumers should recognize that you won’t fix bad credit “overnight.” The basis of your credit score is your credit history. Going in with reasonable expectations is vital.
A repossession will likely cause a 100-point decline in your credit score. By using an aggressive credit-building strategy, you should expect results in as little as six months.
Be mindful that you might also benefit when adverse credit report entries no longer appear, which should be in seven years.
Is it Hard to Build Credit After a Repo?
The amount of time and effort needed for rebuilding a poor credit history varies according to the circumstances. One important variable involves the severity of the damage.
Consumers who experience the repossession of a vehicle should expect that it will take some time for dramatic improvement. Motivated consumers should create a written plan with two or more main strategies.
The initial step should involve correcting any credit report errors. Next, you must make timely payments on all existing accounts.
Also pursue new options including credit-builder loans or secured credit cards. Bear in mind that people who recognize improvement in their credit score usually develop positive momentum. Setting goals and monitoring your progress should help keep you motivated.
Can a Repossession Be Removed From a Credit Report?
Any accurate entries (negative or positive) cannot be removed from your credit report through the bureaus. Lenders rely on the integrity of credit bureau data for making important decisions.
Yet, your existing credit history might contain mistakes or errors that you can dispute. Here, an entry that is hindering your credit score might be removable in less than 30 days.
Keep in mind that most derogatory credit report entries are automatically removed after seven years. In the meantime, using a host of other credit improvement strategies will help you obtain a good score.
How Much Will My Credit Score Go Up When a Repossession is Removed?
When seven years pass, any credit report entries involving the repossession should disappear. As with any negative accounts, consumers should experience some uptick in their credit score.
But be mindful that the credit scoring models admittedly place greater emphasis on newer accounts. By the time seven years pass, you will likely have already restored your credit score to new heights.
- How Soon Can I Get My Repossessed Car Back?
- My Car Was Repossessed. What Happens Next?
- How Long Does a Repo Stay on Your Credit?
- Writing a Sample Letter to Remove Repossession From Credit Report
Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.