Repossessed Car Wrecks Credit

Dear Debt Adviser,

I have a charge-off on my credit report for a repossessed car. The car was auctioned and my account was sold (I assume) to a collection agency, to which I pay $300 a month to pay off the remaining balance. I've been paying faithfully for nearly two years and have approximately 30 more payments until the balance is paid. I'd like to know if the charge-off will be removed from my credit report when the balance is paid, or do I have to wait an additional three to five years? Is it possible to get the charge-off removed before the balance is paid off, since my repayment history to collections has been perfect? -- Ashley

Dear Ashley,

Wow, you have learned a very expensive financial lesson. And by writing to me you are allowing me to perhaps help other readers learn from your mistake without going through the same painful process.

When your car was repossessed and sold at wholesale auction, the proceeds from the auction, minus the repossession expenses, went to the lender of your auto loan. The balance left on the loan after auction is what your $300 per month is going toward. When all is said and done you will have paid more than $15,000 and have no car to show for it. Ouch.

There are several reasons why the amount you are paying is so high. One, the creditor can add expenses related to the repossession to the loan balance. These might include storage fees, attorney fees and/or early lease or loan termination fees.

Two, the creditor must sell the vehicle in a "commercially reasonable manner," but the sale price rarely covers what is still owed. Three, unless you put a large down payment on your car, you were probably upside down (owed more than the car is worth) before the repossession.

The charged-off loan item on your credit report will be removed seven years from the initial date of the delinquency that ultimately resulted in the charge-off. Unfortunately, once a negative, yet accurate, item appears on your credit report, it will almost always remain for the seven-year reporting time frame. (That time frame is longer for bankruptcies and some judgments.)

If you had the money to pay the collector in full at the beginning of the collection process, you might have had a shot at getting the negative item removed. But the reality is that most reputable collectors won't take a delinquency off your credit report even for a quick payment, although some may consider it. Of course, if you'd had that much money, you probably wouldn't have faced repossession in the first place.

The good news is the negative item will have less impact on your credit score as time passes. This is especially true if you add new, positive data to your credit reports in the meantime. If you add on-time payments on the agreed terms to your other credit lines, the positive lines will eventually have more weight on your credit report than the charge-off. Your credit will slowly improve. In addition, future lenders will view the paid charge-off as a sign that, although you made a credit mistake, you ultimately paid what you owed.

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