How does breaking a lease affect my credit score?

• A rental agreement specifies how you can break a lease without any legal or credit score implications.
• But if you break your lease without following those steps, it may be reported on your credit history and affect your credit score.
• Read on to find out how to break a lease without affecting your credit score.

Sometimes you have no choice but to break a lease, such as when you have to move to a new place due to change of employment or other circumstances. But there is a right and a wrong way to do this.

Doing it the wrong way means breaking the terms of the lease agreement. The right way is to follow the terms to the letter and keep your landlord's goodwill. The goodwill part can help you preserve your credit, even when you are unable to pay everything in full immediately.

Not all instances where people break their leases are reported to credit reporting bodies. It happens only when your landlord is driven to take legal action against you to recover money due or has to go to a credit collector to recoup unpaid funds.

Read on to learn how to avoid this and maintain a clean credit record.

What does it mean to break a rental agreement (lease)?

A rental agreement or lease is a legal document in which you agree to pay a certain rent for a given period. Most lease agreements define the steps you need to take to break the lease, effectively terminating the agreement.

Typically, you are required to give a period of notice to the landlord and pay two months' rent together with an early termination fee. Otherwise, you are forfeiting your security deposit and asking for trouble.

If you leave a rental property before the given time, or do so without giving the required notice, you are breaking the terms of the lease agreement, which is considered breaking the lease.

If you can pay all your rental dues before you move out, there is no reason that breaking the lease should affect your credit score. But if you are unable to adhere to all the terms of the lease and leave the property without paying, a number of things can happen that end up affecting your credit score:

• Your landlord may use a collection agency for collecting any unpaid rent from you. Although landlords do not usually report to credit bureaus about unpaid rents, it is possible that a collection agency may report it. These collection mentions could stay on your credit report for several years. And they may affect your credit score.
• Your landlord may even sue you. A lawsuit in the small claims courts in which you are ordered to pay back your rental dues and the landlord’s legal fees will become part of your credit history.

Does breaking a lease affect your credit score?

It’s not breaking a lease that’s the problem, it’s how you break it that can affect your credit score. Here’s what can happen if you do not pay what you owe the landlord when breaking a lease:

• A lawsuit in a small claims court: If the landlord takes the case to the courts, and the judgement goes against you, the court will require you to pay not just overdue fees, but penalties and the landlord's legal costs. All such judgments are entered into public record and will be recorded on your credit report.
• Your landlord goes to a collection agency: The collection agency may report this to credit bureaus. Once they do, the broken lease becomes part of your credit and rental history.
• Issues when renting another place: Many landlords conduct credit checks on potential renters. They can refuse rentals to applicants who have a history of unpaid debts in their credit report.

Credit reporting bodies such as illion, Experian, and Equifax calculate your credit score based on a number of factors including negative credit listings on your record, court writs or default judgements relating to you, and repayment history including any overdue or defaulted debts and bankruptcies.

Do landlords run credit checks?

While not all landlords run credit checks before signing a lease rental agreement, some do. If you have broken a lease previously, and it has been reported to a credit bureau, it would be mentioned on your credit file.

If a potential landlord checks your credit file for your history of rentals, or contacts your previous landlords, a broken lease will make you look like a high-risk tenant. This may result in your rental application being declined.

How to check your credit score

You can use Finty to check your credit score. It’s fast and totally free, and uses state of the art encryption to secure your data and privacy. Finty uses a soft inquiry to check your credit score, which does not have an impact on your credit file.

How to break a lease without hurting your credit

The best way to break a lease agreement is to follow the terms of the agreement. All lease rental agreements have terms and conditions that you must fulfil before terminating a lease.

Typically, these include:

• Giving the required period of notice to the landlord
• Paying all due rentals
• Paying a termination fee before moving on

If you plan to break a lease early, carefully read the lease agreement.

You will need to give the required period of notice to the landlord in writing, pay the months of rent required in the lease and the termination fee. If you do it according to the lease terms, there should be no problem. If you don't, you are breaking the lease and may have to give up your security deposit and face the potential risk of messing up your credit.

Have you broken a lease already? Did you fail to give the required notice to the landlord or fail to pay the rentals due or the termination fee? In this case it may or may not affect your credit score, depending on what steps the landlord takes. The best thing to do now is talk to the landlord and pay your dues, as soon as possible. This would prevent your credit history from being affected.

FAQs

How do I correct mistakes on my credit report?

Under the provisions of the Fair Credit Reporting Act (FCRA), credit reporting bodies in Australia are required to take reasonable steps to ensure that the information appearing on your credit report is accurate, up to date, complete and relevant.

Violations of the FCRA may occur when:

• A credit reporting agency fails to correct any errors or explain why your credit report is correct within 30 days of receiving a notice of dispute from you, the consumer.
• An entity such as a bank or card company pulls or checks your credit (in a hard inquiry) when you haven't authorised them to do so.

If there are errors in your credit report, like loans or credit cards you did not apply for, and other key elements in your credit report (such as your name and address), you are entitled to demand a correction under the FCRA, free of charge.

Take the following steps:

• Ask for a copy of your credit report and check its contents carefully.
• If you find any mistakes, contact the credit provider (such as bank or credit card company) whose information is inaccurately recorded and ask for a correction. Most lenders have a formal process for filing of and handling correction of credit information. Make that your first step to get your credit report corrected.
• You can also request the credit reporting body to correct your credit-related personal information.
• If your lender or the credit reporting body you made the request to is satisfied that the information is incorrect, they must take reasonable steps to make a correction within 30 days. They are also required to send you a written notice about the correction. Additionally, they must send notices to parties to whom they disclosed the information within a reasonable period.
• If your lender or the credit reporting body is not satisfied that the information is incorrect, then they have to explain their reasons to you in writing within 30 days. They must also let you know that you can access an external dispute resolution scheme or make a complaint. This must be done free of charge by lenders and credit reporting bodies.
• If you are unhappy with the response from your credit provider or the credit reporting body, you can lodge a complaint with the Office of the Australian Information Commissioner (OAIC).

Keeping a close eye on your credit reports and monitoring accuracy is part of being a financially responsible citizen. This is because you do not want to become a victim of fraud and error and be surprised by it when you need to borrow money.

How do I improve my credit score?

If you are just starting out in life, it is only by using credit that you can improve your credit score. Consider getting a credit card and using it responsibly. Responsible credit card use is one way to build up a good credit score.

If you have bad credit, know that it can be repaired. But credit scores cannot be improved overnight and the process takes time. Mostly, credit scores are determined by the results of your own actions. Being responsible with credit is something you need to work on if you want to improve your credit score.

Credit scores can also be affected by errors that creep into your credit report. These need to be corrected. (See above FAQ on how to correct mistakes on your credit report).

The following ideas will help you improve your credit score over time:

• Check your credit file by checking your score.
• Obtain your credit report and review it periodically. Make sure that it is fair and accurate.
• Remove any significant inaccuracies from your credit report.
• Use services offered by your bank such as automated payments to avoid penalties.
• Have a credit card and keep your debt-to-credit ratio low. That means using less than your total available credit. Instead of always borrowing up to the credit limit, ask the card issuer for an increased credit limit. Then, make it a point to borrow well below the new available limit to improve your credit score.
• Do not apply for too many loans or credit cards within a short period.
• Make payment on loans and credit cards on a timely basis and avoid penalties.
• Being prompt with payments shows your creditworthiness to potential lenders.
• Using different types of credit responsibly – such as car loans, home loans and credit cards – will help raise your credit score.
• Instead of closing rarely used credit cards, keep the account open. (Check the annual fees first!)
• Avoid changing jobs and houses frequently because it can be perceived as a sign of instability and lack of staying power.

Check out our article on how to improve your credit score.

The verdict

When you break a lease, it is not recorded on your credit report automatically nor does it affect your credit score. What affects your credit score are the actions taken by your landlord to recover money from you, such as engaging a collection agency or filing a small claims lawsuit.

If you want to break your lease without negatively affecting your credit score, read the agreement carefully, give the due notice and pay all due rentals and termination fee, if applicable. You may agree with your landlord on a reasonable payment period so that the matter does not end up in court or referred to a collection agency. It is within your control to avoid both these outcomes and to avoid mentions in your credit report or an adverse impact on your credit score.