Does an Early Lease Termination Affect Credit?

An early lease termination can influence a credit report, but not directly through the act of ending the lease itself. Instead, the impact arises from the financial obligations that may result from such a termination. Understanding these mechanisms is important for anyone considering ending a lease agreement ahead of schedule.

Lease Agreements and Credit Reporting Basics

Lease payments, whether for a vehicle or a residential property, differ from traditional loans or credit cards in credit reporting. For residential leases, regular, on-time rent payments typically do not appear on credit reports unless a third-party service is used, so they don’t generally build positive credit. Vehicle leases, however, are often reported to credit bureaus as installment loans, allowing on-time payments to build credit.

A lease impacts a credit report primarily when financial obligations are not fulfilled, such as missed payments or unpaid charges. When these financial obligations become delinquent, the lessor may report the overdue amounts to credit bureaus, or the debt may be sold to a collection agency. This failure to meet financial terms, not the early termination itself, leads to negative credit entries.

Events Leading to Credit Report Entries

Early lease termination can generate financial obligations that, if unpaid, lead to negative credit report entries. Lease agreements typically include financial penalties for early termination, such as specific fees. Unpaid fees become outstanding debt.

Beyond termination fees, a lessee might remain responsible for a portion or all of the remaining lease payments if the property or vehicle is not re-leased quickly. Additionally, charges for excessive wear and tear or damages beyond normal use may be assessed. If a lessee fails to pay these amounts, the lessor may pursue collection. If the lessor sells unpaid debt to a collection agency, the agency typically reports it to major credit bureaus, leading to a collection account entry.

In some cases, if the unpaid debt is substantial or efforts to collect are unsuccessful, the lessor might pursue legal action against the lessee. If a court rules in favor of the lessor, a civil judgment may be issued. While civil judgments were historically reported on credit reports, the three major credit reporting agencies (Equifax, Experian, and TransUnion) no longer include them. However, the underlying unpaid debt that led to the judgment could still be reported as a collection account.

Understanding Credit Report Indicators

If financial obligations from an early lease termination are not met, several types of negative entries may appear on a credit report. A common entry is a collection account, which indicates that a creditor has sold an unpaid debt to a third-party collection agency. This entry typically shows the original creditor, the collection agency’s name, and the amount owed. Collection accounts can remain on a credit report for up to seven years from the date the account first became delinquent.

Another entry is a charge-off, which occurs when a creditor determines an unpaid debt is unlikely to be collected and writes it off as a loss. While closed to future charges by the original creditor, the debt is still legally owed. A charged-off account can be sold to a collection agency, leading to both a charge-off and a collection account. Similar to collections, charge-offs can remain on a credit report for up to seven years from the first missed payment.

Late payments can also be reported if the lease account was already reported to credit bureaus, such as with many auto leases. A payment is considered late for credit reporting if it is 30 days or more past due. These delinquencies are reported in 30-day increments (e.g., 30, 60, 90 days late) and can remain on a credit report for up to seven years from the original delinquency date.

Accessing and Reviewing Your Credit Report

After an early lease termination, regularly review your credit reports for new entries. Consumers are entitled to a free copy of their credit report from each of the three major nationwide credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. These reports can be accessed through AnnualCreditReport.com.

When reviewing reports, look for specific sections that might contain information related to a terminated lease. This includes the “Public Records” section. Check the “Accounts” or “Tradelines” section for entries from the former lessor or related collection agencies. Specifically, look for accounts marked as “collection,” “charge-off,” or those showing a history of late payments.

If any information appears inaccurate or incomplete, you have the right to dispute it with the credit reporting company or the business that provided the information. The dispute process involves explaining in writing what you believe is incorrect and providing supporting documentation. Credit bureaus must investigate disputes, and if information is found inaccurate, it must be corrected or removed.