How Does Breaking a Lease Affect Your Credit?

Breaking a lease can have financial consequences that extend to your credit report. A lease agreement is a legally binding contract between a tenant and a landlord, outlining the terms and conditions of renting a property. Terminating this agreement before its stipulated end date is considered “broken,” and the manner of termination can significantly influence an individual’s financial standing.

Understanding Lease Termination

A lease is a contractual commitment to rent a property for a specified period, typically six months to a year or more. Ending this agreement prematurely, or “breaking a lease,” can occur in several ways. One method involves a mutually agreed-upon early termination, where both the tenant and landlord consent to end the lease before its scheduled expiration. This often involves a formal mutual lease termination agreement, detailing the new termination date, financial settlements, and security deposit return.

Another scenario involves exercising an early termination clause, if one is included in the lease agreement. These clauses outline specific conditions for early termination, often requiring a notice period, such as 30 to 60 days, and potentially an early termination fee, which can be one to two months’ rent. Legal reasons for early termination without penalty exist, such as uninhabitable living conditions, landlord violations of the lease, or military deployment under the Servicemembers Civil Relief Act (SCRA). The SCRA allows active-duty military personnel to terminate leases without penalty if they receive deployment orders for 90 days or more, requiring written notice and a copy of their orders.

A less favorable way a lease can end prematurely is through an unapproved breach of contract. This occurs when a tenant abandons the property without notice, ceases rent payments, or otherwise violates the lease terms, leading to potential eviction.

In cases of non-payment of rent, landlords issue a written “pay or quit” notice, giving the tenant a timeframe, such as 7 to 14 days, to pay overdue rent or vacate the premises. If the tenant fails to comply, the landlord can initiate formal eviction proceedings, which may result in a court-ordered eviction and a money judgment for unpaid rent and damages.

How Lease Information Appears on Credit Reports

Information from a broken lease can appear on a credit report when financial obligations are not met. While landlords typically do not report regular rent payments or late payments directly to the three major credit bureaus (Experian, Equifax, and TransUnion), delinquent accounts can be reported indirectly. The most common way this occurs is when a landlord sells or assigns the outstanding debt, such as unpaid rent or damages, to a third-party collection agency. Once a debt goes to collections, the agency will report the account to the credit bureaus, creating a negative entry on the consumer’s credit report.

Property management companies may also directly report delinquencies, though this is less common. Negative marks that might appear from a broken lease include collection accounts, which can remain on a credit report for up to seven years from the date the account first became delinquent. Public records from legal actions can also impact a credit report.

Civil judgments, court orders for monetary awards against a tenant for unpaid rent or damages, generally no longer appear directly on credit reports. However, the underlying debt that led to the judgment, such as late payments or collection accounts, can still be reported. While eviction records themselves do not appear on credit reports, the unpaid debt associated with an eviction, if sent to collections, will be reported and can severely affect credit scores. These public records, even if not on a credit report, are accessible through public record databases and can be viewed by prospective landlords and lenders.

Impact on Your Credit Score

When negative entries from a broken lease appear on a credit report, they can significantly lower a credit score. Credit scoring models, such as FICO Scores, calculate a score based on five main categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Payment history is the most influential factor, accounting for 35% of a FICO Score, making timely payments important for a good score. A collection account from unpaid lease obligations indicates a history of missed payments and can cause an immediate and substantial drop in a credit score, potentially by 50 to 100 points or more.

The presence of collection accounts severely impacts the payment history component, signaling increased risk to future lenders. Even if a collection account is paid, it can remain on the credit report for up to seven years from the date of the original delinquency, though its impact lessens over time. This can make it more challenging to secure future housing, as landlords often check tenant screening reports that include eviction history, even if not reflected in the credit score.

Addressing Inaccurate Credit Report Entries

If a consumer believes that information related to a broken lease on their credit report is inaccurate or incomplete, they have the right to dispute it. The process begins by obtaining free copies of credit reports from the three major credit bureaus: Experian, Equifax, and TransUnion. Reviewing these reports helps identify erroneous entries, such as incorrect amounts, duplicate accounts, or accounts that do not belong to the consumer.

Once an inaccurate entry is identified, the consumer should gather supporting documentation proving the information is incorrect. This can include bank statements, payment receipts, or correspondence from the landlord or collection agency. The dispute can then be submitted to the credit bureau(s) reporting the inaccuracy, online, by mail, or by phone. It is advisable to send disputes by certified mail with a return receipt to ensure proof of delivery.

Under the Fair Credit Reporting Act (FCRA), credit bureaus are required to investigate disputes within a certain timeframe, typically 30 days, or up to 45 days if additional information is provided after the initial dispute. The credit bureau will forward the dispute to the information furnisher, the entity that provided the information, such as a collection agency. The furnisher must then conduct a reasonable investigation and report the results back to the credit bureau. If the investigation confirms the information is inaccurate, incomplete, or cannot be verified, the furnisher must update or remove the entry from the credit report. If the dispute is not resolved to the consumer’s satisfaction, they can request that a statement of dispute be added to their credit file.