How Much Does Breaking a Lease Hurt Your Credit?
Understand how breaking a lease impacts your credit score, what factors determine the severity, and how long it affects your financial record.
A residential lease is a legally binding contract between a landlord and a tenant, outlining terms for occupying a property for a specified period. Breaking a lease refers to ending this agreement prematurely without fulfilling the terms, such as moving out or failing to pay rent without mutual agreement. While breaking a lease itself does not directly appear on a credit report, financial consequences from early termination can impact one’s credit profile.
How Credit Reports are Affected
A broken lease can affect your credit report indirectly, primarily through unpaid financial obligations. The most common impact occurs when unpaid rent or fees are transferred to a third-party collections agency. Landlords generally do not report routine rent payments or lease violations directly to credit bureaus. However, if a tenant fails to pay outstanding balances, the landlord may engage a debt collection agency. Once an account is placed with a collection agency, it is likely to report the debt to major credit bureaus like Equifax, Experian, and TransUnion, resulting in a collection account on your credit report.
Another mechanism through which a broken lease can affect credit is a civil judgment. If a landlord sues a tenant for unpaid rent or damages and wins, a civil judgment may be issued against the tenant. Historically, civil judgments appeared as public records on credit reports. However, the three major credit bureaus generally no longer include civil judgments on consumer credit reports due to updated reporting standards.
Despite this, the debt remains legally owed, and the judgment remains a public record that could be discovered through other means, such as background checks for future housing applications. While less common, some large property management companies might directly report payment history to credit bureaus, but this is not the typical practice for most landlords.
Key Factors Determining the Severity of Impact
The extent a broken lease affects a credit score varies, influenced by several factors. The amount of outstanding debt plays a significant role, as larger unpaid balances sent to collections or larger judgment amounts lead to a more substantial negative effect on credit scores. A higher financial obligation indicates greater risk to potential lenders or creditors.
The specific type of negative mark on the credit report also influences severity. While collection accounts are detrimental, the presence of a collection account stemming from unpaid lease obligations can still significantly impact creditworthiness. Major credit bureaus no longer report civil judgments.
An individual’s existing credit profile can mitigate or exacerbate the impact of a new negative mark. A person with a strong credit history might experience a less severe drop compared to someone with a limited or poor credit history. The recency of the negative information also matters; newer collection accounts tend to have a greater impact than older ones. As time passes, the influence of the negative mark diminishes, even while it remains on the report.
Credit Score Changes and Reporting Duration
When a broken lease leads to a collection account, the impact on a credit score varies based on individual credit profiles and the negative entry’s details. Both FICO and VantageScore models consider collection accounts, causing a decline in scores. The exact score drop depends on factors like the amount owed and the overall health of the credit report. A single collection account can notably reduce a score, especially for those with high credit scores.
Most adverse entries, such as collection accounts, stay on a credit report for up to seven years. This period typically begins from the date of the original delinquency, the first missed payment that led to the account going into collections. Even if the debt is paid or settled, the collection account often remains on the credit report for the full seven-year duration. The three major credit bureaus no longer include civil judgments on consumer credit reports.
Monitoring Your Credit Profile
Regular monitoring of your credit reports is important to understand the potential impact of a broken lease. Consumers can access a free copy of their credit report annually from each of the three major credit bureaus—Experian, Equifax, and TransUnion—via AnnualCreditReport.com. Reviewing reports from all three bureaus is advisable, as each may contain slightly different information.
When reviewing your credit report, look for collection accounts stemming from unpaid rent or fees related to a broken lease. These are typically listed under derogatory marks. Verify the accuracy of all information, including the account balance, the date of original delinquency, and the reporting agency.
If you identify inaccuracies, you have the right to dispute them under the Fair Credit Reporting Act (FCRA). The dispute process involves contacting both the credit reporting company and the furnisher (e.g., a collection agency). Explain in writing what is wrong and include supporting documents. Credit bureaus must investigate disputes within 30 days and correct or remove inaccurate information.