- Breaking your lease may hurt your credit score if you have unpaid rent or fees in collections.
- If you pay off your collections accounts, you may see an improvement in your credit score.
- To avoid issues when breaking a lease, communicate with your landlord and pay any outstanding debts.
When you rent an apartment, your landlord will typically ask you to sign a lease, which is a binding legal contract that explains your rights and responsibilities as a tenant. Most lease lengths are anywhere from six months to two years, though they could sometimes be longer or shorter. Once your lease ends, you and your landlord decide whether to extend it.
However, life is unpredictable, and unforeseen events like a job loss or medical issue can disrupt your housing plans. In some cases, breaking a lease might happen ... and it could hurt your credit score.
Does breaking a lease hurt your credit?
Yes, breaking a lease can hurt your credit. There are factors that will determine how severe and negative that impact is, such as reasons for breaking the lease, the terms of your lease agreement, and your payment history. If you think that you will need to break your lease, there are steps you should take to minimize the impact.
How does breaking a lease work?
A tenant who walks away from a rental contract without warning or reasonable explanation will have broken their lease. But there are times when breaking a lease is necessary. For example, a friend's father had a stroke, and she left New York in a matter of days. She put everything in storage and was back home with her father. She had no interest in negotiating with her landlord or anything else but getting home.
Sometimes breaking a lease can't be helped.
Common reasons for breaking a lease
You might have to break your lease for reasons such as a job offer out-of-state or medical issues, or even an apartment that becomes uninhabitable. But working out a settlement with your landlord instead of walking away from the rental contract will be better for your credit and financial life.
Consequences of breaking a lease
Besides damaging your credit score, breaking a lease could also impact you in the following ways.
Paying early termination fees
"Most standard leases will outline a fee — often one to two months' worth of rent — to break your lease early," says Scott Neu, AIF, Financial Advisor at Reinke Gray Wealth Management. So, if your rent is $1,500 a month, be prepared to shell out $1,500 to $3,000 to cover this additional cost if you break your lease.
Before submitting your intent to vacate and terminate the lease early, Neu suggests that you get the specific early termination fee amount confirmed in writing by your landlord to avoid any issues down the line.
Forfeiting your security deposit
"Even once early termination fees are paid, your landlord may still withhold part or all of your security deposit to cover perceived damages — including loss of expected rental income," Neu says. Most security deposits are equal to one month's rent, though some landlords may charge as high as three months' rent before they hand you the keys. If you break your lease, your landlord can deduct from your security deposit to cover any damage repairs, unpaid rent, outstanding utility bills, and other losses.
To maximize the amount of security deposit you get back, Neu recommends thoroughly cleaning the apartment before handing the keys to your landlord and making sure to document the unit's conditions with photos in case of any future disputes.
Trouble renting in the future
"Landlords want tenants they can trust, and a history of breaking leases early — even if it just happened once — may strike them as a red flag. This is especially true if your lease ended contentiously and you've had some scuffles with your previous landlord as a result," Neu says. And even if you didn't end up in court or with a knock on your credit score, Neu warns that some landlords will call previous landlords for references, and if they find out you broke your contract, they may not want to take a chance on renting to you.
In some cases, landlords may still rent to you if you pay a higher security deposit. However, this means paying more upfront and potentially losing more if you fail to fulfill the terms of the lease agreement once again.
Lawsuits
A landlord could sue you to collect the amount remaining on your lease. This takes time and money, and if the landlord is successful, the lawsuit could result in judgment.
How does breaking a lease affect your credit score?
How credit scores are impacted by lease terminations
A broken lease, in itself, will not damage your credit score as it doesn't appear on your credit report. But if you have unpaid rent or fees associated with breaking the lease, your landlord could send your account to a collections agency.
Once your account is in collections, the agency will most likely report the negative information to the three credit bureaus: Equifax, Experian, and TransUnion. This will significantly drop your credit score and continue to hurt it until it falls off your credit reports seven years after the debt was initially due.
That said, if you pay off any outstanding debts in collections, you may see a rise in some of your credit scores. Commonly used credit scoring algorithms like FICO 9 and VantageScore 3.0 don't consider paid collections in their calculations. However, FICO 8, one of the most popular credit scoring models among lenders, still considers paid collections as a negative mark in its scoring calculations.
How to break a lease without hurting your credit
If you must break a lease due to unforeseen circumstances, take the following actions to ensure your credit score stays intact.
- Negotiate with your landlord. Communication is key. "To break a lease responsibly with minimal credit impact, communicate proactively with your landlord once decided — ideally 60 to 90 days in advance," suggests Neu. Sometimes, landlords may be willing to work out a mutually beneficial arrangement, such as allowing you to find a subletter or replacement tenant yourself.
- Use "Break Lease" clauses. Andrew Latham, Certified Financial Planner and the Director of Content at SuperMoney.com, suggests reviewing your lease for any clauses that allow for early termination under specific circumstances like job relocation and military service. "Leases sometimes include terms detailing how to legally break the lease and the associated costs," he adds.
- Pay outstanding rental debt. Before packing your bags, clarify the amount of rent and fees owed to your landlord and make sure to pay them off in full. If there's any outstanding rental debt, your landlord could send your account to collections, which could leave a stain on your credit report and damage your credit score.
- Keep detailed records. Remember to document all discussions and termination fee agreements in writing. This way, if a mix-up happens or inaccurate negative items show up on your credit report later on, you'll have evidence to support your dispute.
- Seek legal advice. Consult with an attorney specializing in landlord-tenant law to understand your rights and obligations.
As long as you pay all the associated fees and communicate with your landlord, breaking a lease should not hurt your credit score.
How to recover from breaking your lease
If you find yourself in a situation where you must break your lease, here are a few steps to take once your lease is broken.
- Be prepared for a collection. The landlord can send your account to collections. That collection account may appear on your credit report, which will impact your credit score.
Monitoring your credit report for changes. If you haven't been already, start monitoring your credit report for changes (you can use a credit monitoring service if you want to automate it) and see if the unpaid amount of rent hits your credit report in the form of a collection account.
- Try to negotiate and pay off the debt. You can negotiate with your landlord for a lump sum settlement amount to pay off the debt. If the debt has reached a collection agency, work with the agency to pay off the debt before it hits your credit report.
Rebuilding your credit after a lease break. Rebuilding your credit after breaking your lease is the same as rebuilding your credit after any other hit to your credit. It will take time and a focus on building a positive payment history and keeping your utilization ratio low.
- Be prepared to explain. When applying for credit in the future, be ready to explain what led to you breaking the lease and what you did to resolve it.
It's important to weigh your options, understand your responsibilities, and consider the impact that breaking a lease can have on your credit. If breaking your lease is unavoidable, take proactive steps to minimize the damage and recover from the situation. It is even advisable to consult with an expert in these matters for the best course of action.
Frequently asked questions about whether breaking a lease hurts your credit score
No, breaking a lease does not automatically hurt your credit. Breaking a lease impacts your credit when the unpaid debt is sent to you a collection agency and then the collection is reported to the credit bureau.
Removing a history of unpaid debt from a broken lease from your credit report can be challenging, since accurate negative information typically stays on your credit report for years. However, if you believe the negative item is inaccurate, you can file a dispute with the credit bureaus to remove it.
Negative information about apartment debt, such as unpaid rent or fees, generally stays on your credit report for seven years from the original delinquency date, even once the debt is paid off.
Yes, there is a difference between breaking a lease and early termination. Breaking a lease typically happens when you walk away from the rental contract without cause or explanation, while early termination is when you discuss leaving the apartment before the lease ends due to reasons like a job offer out-of-state or a medical issue and settle on an amount that will allow you to leave the lease early.
