Will Breaking a Lease Kill Your Credit Score?

When renting an apartment or home, you often sign a lease agreement with the homeowner or the property manager. Signing a lease agreement obligates you to pay a specific amount of rent for a certain period of time. For example, it can be a two or three years agreement. With that said, it is not always the case that you are able to stay for the entire length of the lease. Sometimes the unexpected happens and you end up terminating the lease earlier than both parties anticipated.

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Let’s say you get another job elsewhere and as logic dictates, you have to relocate closer to your new workplace. This means an early termination of your lease agreement is in the cards. How does that affect your credit report? Well, it’s not always the case that an early termination results in hurting your credit.

If your lease has a termination clause and you follow it, you have nothing to worry about. However, in the absence of a termination procedure on the lease, you have to be careful and engage the landlord on how you can terminate your lease amicably.

On another perspective, the pandemic has rendered many jobless and, as reported by the National Multifamily Housing Council (NMHC)’s Rent Payment Tracker, just this month alone, nearly 20% of Americans couldn’t make a full or partial rent payment by the sixth day of the month.

Even though tenants at the moment are enjoying the eviction moratorium extension by the federal government till June, falling behind rent dues still poses a threat to the relationship with the landlord. It’s possible that termination will be in the cards after the eviction moratorium notice expires. Being a tough time for many people, finding income based apartments would certainly be a great move.

Let’s dive in and uncover how does breaking a lease affect your credit score.

Does Breaking A Lease Affect Your Credit?

Breaking your lease early will likely hurt your credit history. Whenever you choose to break a lease early, no matter the circumstance, you need to be careful on how you proceed, otherwise you may risk ruining your credit report.

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Normally you’ll face the cost of breaking the lease early to compensate the remaining months, as stipulated in the lease agreement. Failure to pay these fees may directly hurt your credit report, as the landlord has the right to turn over the debt to a collection agency. With your debt in the hands of a collection agency, there’s a high chance it will be reported to the three main credit bureaus (Experian, Equifax, and TransUnion). This would ultimately bruise your credit history.

It is always important to read the lease terms and understand the details before signing. Even if you are sure you’ll be at the apartment for a long time, that shouldn’t be an excuse for not agreeing on a termination procedure, or at very least reviewing it. Never say never! Anything can happen at any time, and relocation could be unavoidable. Any mix-ups can result in damaging your credit history, which could leave you vulnerable in the future.

If you ultimately have to relocate, or simply move out, before the end of your lease, be sure to settle all your debts with the landlord, and keep the record to prove everything is settled. This way you will avoid affecting your credit history.

According to Roger Ma, a certified financial planner at lifelaidout, and author of ‘Work Your Money, Not Your Life,’ “Breaking a lease could impact your credit report and credit score if you don’t pay all of the associated fees due.”

Failing To Pay Rent & Issues That Can Arise

If you’ve established that breaking the lease early is the only choice left, after careful consideration, then what’s next? What are the consequences that you are likely to face?

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Well, it depends on the action you take. If you choose to square out the breaking fee and settle the damages too, you probably have no reason to be scared of ruining your credit report, so long as you keep the record of the payment. Your credit history will only have the potential to be affected if you fail to settle the debt.

If you fail to pay the penalties, you are likely to face some consequences, as outlined below.

You Are Likely to Have Problems Finding Rentals In The Future

Whenever you rent elsewhere, the landlord will likely check out your background and certainly contact your previous landlords. In the event of an early broken lease, it may appear on your credit history, the landlord might get cold feet in accepting you into the apartment.

If the same happens in every apartment you visit, it is certainly going to be a tough job to find apartments for rent.

You Are Likely To Be Sued By The Landlord

The last thing you will want after breaking your lease agreement is facing litigation. Regardless of how genuine the reason could be, reaching common ground with the landlord is a wise thing to do instead. Being sued will only add the possibility of getting fined and further increase your cost that you were initially running away from.

How to Break Your Lease Agreement (No Credit Issues!)

However sticky the situation might be, you can always make a truce with the landlord, as they are usually willing to work things out and avoid escalating issues further. How do you break your lease without hurting your credit report? You can avoid hurting your credit history by applying the following.

Have A One-on-One Talk With The Landlord 

It’s never easy to face the landlord and give reasons as to why you are behind on your rent dues. Most people shy away, however, facing the issue will certainly be wiser than vanishing without a word.

Landlords can be understanding and sometimes lenient in the decision they will take upon you sharing your story. You may be able to negotiate a solution that will be less damaging than ruining your credit history.

Consider Paying All Of Your Outstanding Rental Debts

You can avoid any possible trouble with the landlord by paying all of your outstanding rent debt. If that means giving up the security deposit as part of the penalty, it is certainly worth it. However, in most cases, the lease will entail a termination procedure.

Settling the debt will evade any chances of the landlord handing your debt to a collection agency that will report to the three CRAs.

Find A New Tenant/Subletting

If you have time to plan your exit, you can always consider subletting to cover the remainder of the lease. However, you have to engage the landlord about this decision before subletting. If all goes well, and the landlord agrees, you have no chances of ruining your credit score.

Understand Your Legal Rights

Understanding the lease agreement is important, so consider reviewing it before breaking the lease. The agreement may have the option of breaking the lease by incurring a cost, or maybe finding a replacement for the remainder of the lease.

Either way, it is important to reach an agreement with the landlord on how both parties will proceed and find a solution.

Keep All Records

Regardless of how you handle the termination of your lease, make sure you have everything documented, including any and all conversations with the landlord. Keep a record of all payments made to evade any loopholes. This way, if the landlord thinks otherwise and turns you over to a collection agency, the records will save you.

Why Keeping A Good Credit Score Is Important

While breaking your lease early may seem at times like the only option, protecting your credit score will go a long way in benefitting you in the long run. Your credit report will determine whether you will qualify for lower interest rates loans.

For example, if you are looking for mobile homes for sale or need a loan for a project, a good credit report will be a huge boost on your quest to get the loan. However, if you have a bad credit score, you will be unlikely to get low-interest loans from lenders.

When Is Breaking a Lease Early Justifiable?

We’ve seen the outcomes of breaking a lease early, but is there any chance you can break a lease without facing any repercussions on your credit report? Yes, you can break a lease early if the following applies in your case.

Active Military Duty

If you are called up for active military duty and signed a lease before entering military service, what will happen? Thankfully, there is hope. A federal law called the Servicemember Civil Relief Act (SCRA) is a legal statement allowing an active duty member out of a lease with official military orders. Plain and simple.

Uninhabitable Property

As a tenant, you have the right to live in a habitable environment. As such, the landlord is required to maintain the property in a livable condition. If otherwise, you have the right to terminate the lease without incurring any cost. In this case, according to Findlaw.com, the landlord has failed in honoring their obligation.

Breach of Quiet

You have the right to a peaceful time while at your apartment. However, if another tenant is breaching your rights by playing loud music in the late hours of the night, you can initiate breaking your lease and find peace elsewhere.

Wrapping It Up

Keeping a good credit history is important, and that is why you should do everything within your power to protect it. Talking to the landlord about breaking the lease early will help in smoothing the process and avoid affecting your credit history.

Regardless of the cost you incur, the bigger picture will be protecting your credit report. A good or excellent credit history will qualify you for lower interest rate loans, and you will have no trouble renting in the future when screened by another landlord.