Does Breaking a Lease Affect Your Credit?

breaking a lease

By Sean Bryant

When you sign an apartment lease, you agree to pay a set amount of money each month until the lease expires. But sometimes life happens, situations change, and you might start thinking about walking away from your lease. Before you do though, make sure you consider the pros and cons that could come with breaking a lease early.

One important thing to consider? Always consider how breaking a lease could affect your credit.

Why would you want to break your lease?

There are many different reasons why you might want to break your lease. If you’re relocating for a job, most people would prefer to avoid paying rent on two different homes. While sometimes your company will cover relocation expenses, which could include your old lease payments, that’s not always the case.

You might also decide it’s time to buy a home of your own. This usually doesn’t align with the end of your lease. Unless you plan to cover two housing payments, you might consider walking away from the lease.

Another common reason is when the payments become unaffordable. This can quickly happen if you suffer a job loss and your income is significantly reduced. We’ll talk about ways you could get out of a lease without breaking your credit in a minute. But first, consider the impact if you don’t get your “ducks in a row” first.

Does breaking a lease affect your credit?

When you own a home and have a mortgage, lenders report payment activity to credit agencies. The same is not always true when you’re a renter. Occasionally, if you rent through a large rental agency, they might report rent activity each month. However, it’s fairly common that the only time your landlord would report to the three credit bureaus is when you quit making payments.

“Breaking a lease does not automatically affect a tenant's credit. Most states require the landlord to conduct best efforts to re-lease the apartment.” says Dan Tenenbaum, chair of the California Apartment Association, Los Angeles advisory board.

However, If you do break your lease, landlords have several options for reporting the break, each of which can impact your credit score. These could include:

Hiring a collections agency. This collections agency would then be responsible for collecting the outstanding balance on your lease.

Taking you to small claims court. This could result in a lengthy legal battle.

Either of these options would end up on your credit report and could lower your credit score significantly.

“Many home lenders and apartment owners would weigh unpaid apartment balances more heavily than other types of debt. Tenants need to be careful and minimize the impact on their credit,” Tenenbaum says.

What’s the fallout from breaking a lease?

Most employers pull your credit report when going through the hiring process. This allows them to get a good sense of your financial situation. While they won’t be able to see your credit score, they will be able to see past dings on your report. If you’ve broken a lease and it was reported to credit agencies it can make you look unorganized and irresponsible.

The ramifications are even worse the next time you try and lease a home. Potential landlords are going to do a background check, which includes pulling your credit report. This allows them to make sure you’re a fit and will be able to keep up with payments. If you’ve walked away from a lease in the past, they will see you as a potential risk.

How to break a lease without damaging your credit

Oftentimes the reasons for breaking a lease are justified. But to eliminate the potential negative effects, you need to do it the right way. Here are a few ways to break a lease without it damaging your credit score.

1. Talk to your landlord

The very first thing you should do when you need to get out of your lease is talk to your landlord. Explain the situation and see if you can work something out. If you’ve been a respectful tenant, who pays rent on time, there’s a good chance he or she might be willing to give you a break.

2. Find a sublet

Most rental agreements have the option to find a sublet. This person will take over and fulfill the remainder of your lease term. Check your agreement and see if there is anything that mentions this option. If there is, you will most likely need to pay a small fee. This covers the costs involved in running a background check on potential sublessees.

When going the route of subletting the home, ask your landlord if the new tenant can put down their own security deposit. That way you’re not responsible for anything that might happen before the current lease ends.

3. Thoroughly read the lease agreement

While you’re looking for language on subletting, look over the rest of the lease closely. Many times they’ll include something about early termination. This is specifically designed for situations like these. If there is an early termination clause, it might require giving your landlord proper warning before leaving.

If you must break your lease, do it the right way

If you’re in the position where breaking your lease is unavoidable, it’s not the end of the world. There are almost always options available that can allow you to minimize the financial impact. The worst thing you can do is walk away doing nothing. So work with your landlord to come up with a solution so you can minimize – or avoid entirely – the damage to your credit.

About the author

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards and travel. With nearly 10 years of writing experience, his work has appeared in many of the industry's top publications. He holds a Bachelor of Arts degree in Economics. He also runs OneSmartDollar.com.

Written on April 2, 2019

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