Features

• The three major credit reporting bureaus -- Experian, Equifax, and Trans Union -- determine credit ratings using a formula that the Fair Isaac Corporation pioneered. These companies compile a credit report for nearly all borrowers using a large amount of data reported to them by creditors and other sources. This report is used to assign each borrower a credit score, which measures the probability that the borrower will repay a loan.
  
  

Effects

• A person's credit score is affected by a number of variables. Chief among these is the person's repayment history. This refers to how many loans he has taken out in the past and how well he has repaid them. A person who repays his loans on time will have a higher score than a person who does not. The addition of a repossession on someone's record will cause their score to drop.
  
  

Expert Insight

• According to Experian, the precise amount that a repossession causes a score to drop depends on a number of factors. Among these is the specifics of the repossession -- the amount that the borrower owed on the loan and how late he was in repayment -- and the rest of the borrower's credit history.
  
  

Considerations

• An additional factor affecting the repossession's effect on the person's score is whether the repossession was involuntary or voluntary. A credit reporting bureau may look more favorably on a voluntary repossession -- one in which the borrower agreed to give up the car -- than an involuntary one, because it suggests that the borrower was proactive in addressing his debt. However, to some companies, it makes no difference.
  
  

Solution

• To repair the damage done to his credit rating, a person should take several steps. First, the person can pay off the remaining amount owed on the debt that led to the repossession. One of the chief factors affecting a credit score is the amount of outstanding debt. Second, the borrower can continue to take out additional loans and pay them back on time; over time, his credit rating will improve.