Dear EST,
A "derogatory closure" of an auto loan account most likely refers to an account status that indicates the vehicle was repossessed or voluntarily surrendered.
An account that shows it was charged off as a loss or sold to collections would also be considered derogatory. As long as the account remains on your report, it will be included when the credit scoring models calculate your credit scores. However, the further in the past the account was closed, the less of an effect it will have on lending decisions.
If the account in question is closed due to charge-off, repossession or voluntary surrender, it will remain part of your credit report for seven years from the original missed payment that led up to that derogatory status. That date is referred to as the original delinquency date. The account will be automatically deleted after seven years and will no longer affect your credit scores.
What if You Still Owe a Balance on Your Car Loan?
If your vehicle is repossessed or voluntarily surrendered, the lender will sell it to recoup as much of the balance owed as possible. If there is still a balance remaining after the sale and you don't pay it, it could be turned over to a collection agency.
Once the account is purchased by a collection agency, that collection account may appear on your credit report in addition to the original account.
Collection accounts are treated as a continuation of the original account and will also be deleted seven years from the original delinquency date that led up to the vehicle being voluntarily surrendered or repossessed.
Will Paying Off a Derogatory Account Help My Credit?
Paying off a derogatory account, such as an account that shows a status of repossession, foreclosure or charge off, will result in that debt being updated to show as "paid" on your credit report. The exception would be if the account has already been sold to a collection company.
In that case, the original account will still show the derogatory payment history, but will indicate that it has been transferred or sold to another company, and the payment would need to be made to the company that now owns the debt. If the collection account appears separately on your report, that account will then be updated to show it has been paid.
Although paying a debt will not automatically remove it from your credit history, a debt that has been paid might help your credit history recover a bit more quickly over time.
Lenders may also view a paid account more favorably than an unpaid one, which could help you qualify for new credit somewhat sooner than if the debt is left unpaid. For instance, when buying a home, most mortgage lenders will require that any past-due accounts be paid off or settled in full before they will consider approving you for a loan.
If the account was sold to collections, paying off the collection account could improve your credit scores right away. That's because many of the newer credit scoring models now exclude collection accounts from the score calculations once they have been paid in full.
Rehabilitating Your Credit History
If you have a derogatory account on your credit history and want to begin rebuilding your credit, there are several steps you can take. The first, as discussed, is to pay off any balance still outstanding after the sale of the vehicle. Other ways to begin improving your scores:
- Bring any other outstanding accounts current. If you have any other past-due accounts on your credit report, you'll want to bring those accounts current as soon as possible.
- Make all future payments on time. Your payment history is the most important factor in your credit scores, so be sure not to miss any payments going forward.
- Reduce credit card balances. Your utilization rate, also called your balance-to-limit ratio, is the second most important factor in your credit scores. Paying down high credit card balances and keeping your utilization rate as low as possible is good for scores.
- Get your credit score. Order your free credit score from Experian and take a look at the risk factors that are included with the score. These risk factors tell you what specific changes you can make to your credit history to begin helping your scores increase.
- Add positive payments with Experian Boost®ø. With this free service, you can start getting credit for your on-time utility, cellphone and streaming service payments and boost your credit scores right away.
Thanks for asking.
Jennifer White, Consumer Education Specialist
FAQs
A car repossession is removed from your credit report seven years from the date of the first late payment...
How long does a voluntary repo stay on your credit report? ›
Voluntary repossession can have a significant negative impact on your credit score. This record will stay on your credit report for seven years, potentially making it harder for you to get approved for new credit during this period.
What happens to your credit when you voluntarily surrender? ›
Although voluntary repossession will not negatively impact your credit as badly as involuntary repossession, it will appear on your credit history as a negative mark and will hurt your score.
What happens to a repo after 7 years? ›
A repossession can stay on credit reports for up to seven years. According to Experian®, the seven-year countdown starts on the date of the first missed payment that triggered the repossession. But Experian says that once that time period ends, they'll automatically remove the account from your credit report.
Will my credit score go up after a repo is removed? ›
In most cases, having a repo removed from your credit report will help your score increase. However, it's hard to pinpoint precisely how much your score will improve once your creditor removes the repossession from your record. Several factors can determine how heavily the removal impacts your score.
Is a voluntary surrender better than a repo? ›
Is a repo worse than a surrender? Yes, a repossession is typically worse than a voluntary surrender because it shows that the borrower failed to meet their obligations and the lender had to take action to recover the vehicle. This can have a more negative impact on one's credit score and future borrowing opportunities.
How many points will my credit score drop with a voluntary repo? ›
How Much Does a Voluntary Repossession Affect Your Credit? Estimates vary, but you can expect a voluntary repossession to lower your credit score by 50-150 points. How big of a drop you will see depends on factors such as your prior credit history and how many payments you made before the repossession.
How do I fix my credit after voluntary repossession? ›
How to improve your credit score after a repossession
- Make payments on time. Making on-time payments is the best way to improve your credit score. ...
- Keep your credit utilization low. ...
- Work to pay off any existing debt. ...
- Avoid applying for too many new accounts. ...
- Consider a credit builder loan.
A voluntary repossession will likely cause your credit score to drop by at least 100 points. This point drop is due to a couple of factors: the late payments that cause the repo and the collection account that is likely to result from it.
What is the effect of voluntary surrender? ›
It impacts your credit score
Voluntary surrender is just like any other loan default. Even though you take a proactive step here, it shows up in your credit history and brings down your credit score.
Initiate a formal dispute with all necessary credit reporting agencies (CRAs) that issued the report containing the repossession. You can dispute a repossession online with all three credit reporting agencies, and this is the most efficient way to pursue removal: Experian. Equifax.
Should I pay off a repossession? ›
In most states, you have to pay the entire car loan balance in order to get your car back after repossession. But you might have other options. Whether you have to pay the entire balance of your car loan to get your car back after repossession depends on where you live and the terms of your car loan agreement.
How to remove car loan from credit report? ›
You can remove a car loan from your credit report if the entry is an error by filing a dispute with the three major credit bureaus. If the car loan on your credit report is listed correctly but was never paid off, it will fall off your report after 7 years and you won't be able to remove it early.
How long does repo stay on credit report? ›
A repossession stays on your credit report for seven years, starting from the first missed debt payment that led to the repossession. In the credit world, a repo is considered a derogatory mark. After a repo, it's not unusual to see a person's credit score take a substantial drop.
How bad does a repo look on credit? ›
Having a repossession on your credit report can decrease your credit score by approximately 100 points or more. Keep in mind that someone with a FICO credit score of 669 or below is considered to be a subprime borrower, while an exceptional credit score is above 800.
How bad does a repo hurt your credit as a cosigner? ›
Finally, any court judgments associated with the loan will go on the credit histories belonging to both loan signatories. Even if you have great credit otherwise and make all of your own payments on time, a repossession or default on a loan you cosigned could seriously hurt your credit score.
How do I rebuild my credit after voluntary repossession? ›
How to improve your credit score after a repossession
- Make payments on time. Making on-time payments is the best way to improve your credit score. ...
- Keep your credit utilization low. ...
- Work to pay off any existing debt. ...
- Avoid applying for too many new accounts. ...
- Consider a credit builder loan.
A repossession stays on your credit report for seven years, starting from the first missed debt payment that led to the repossession. In the credit world, a repo is considered a derogatory mark. After a repo, it's not unusual to see a person's credit score take a substantial drop.
Should you pay off a repossession? ›
Often, a bank or repossession company will let you get your car back if you pay back the loan in full, along with all the repossession costs, before it's sold at auction. You can sometimes reinstate the loan and work out a new payment plan, too.
