There are times when unexpected events arise and you may be forced to break your lease agreement on the apartment or home you’re renting. Whether it’s due to financial constraints, job loss, or other reasons, early termination of a lease could have you wondering about whether or not it affects your credit score.
By breaking a lease, you can incur penalties or other fees from your landlord. If you fail to pay these fees, your landlord has the right to turn over the unpaid amount to collections, which can cause a drop in your credit score. Much like defaulting on a loan, untimely payments that are sent to collections can stay on your credit report for up to seven years.
If you’re considering breaking a lease or have already done so, read on as iCash, a top-choice lender for small loans in Canada, explains it can impact your credit score.
Why is Your Credit Score Important?
A credit score is a number that ranges from 300 to 900 and is used to determine an individual's creditworthiness. The higher your credit score, the more likely you’ll be approved for credit. In Canada, any score above 670 is considered a good credit score.
When it comes to renting an apartment, your credit score is also an essential factor that landlords consider when deciding whether to rent to you or not. Many landlords use credit checks as a metric to help them determine if a tenant is responsible and trustworthy with finances. A low credit score might make it challenging to rent an apartment or house in a competitive market.
The Impact of Breaking a Lease on Your Credit Report
Many renters are unaware of the impact breaking a lease can have on their credit score. Below, we’ll discuss the importance of understanding the relationship between breaking a lease and credit scores, so that you can better understand what to expect if you’re considering or have already terminated your agreement.
Lower Credit Score
When a renter breaks a lease, it is considered a breach of contract. Landlords typically report this to credit reporting agencies, which can result in a negative mark on the renter's credit report. This can lower the renter's credit score and make it more difficult to obtain credit in the future.
Poor Credit History
Although landlords are not required to report your delinquency to one of the three major credit bureaus, if they do, it can have a direct impact on your credit rating. What’s more, failure to pay any penalties associated with breaching your rental agreement can be sent to collections and remain on your credit report for up to seven years unless it’s removed by the creditor.
A collection account is considered negative information and can cause poor credit history. Other types of negative information that can appear on your credit report include:
Missed payments of existing debt.
Consumer proposals or bankruptcies.
Other negative information, including foreclosures, short sales, or repossessions.
Unsteady Rental History
Breaking a lease agreement can also affect your rental history. Rental history is an important metric used by most landlords to determine future rental arrangements. If you break a lease, and the repercussions remain on your credit report, it may be difficult for you to rent in the future because a landlord will view you as a risk. It could force you into paying a higher deposit or finding a new guarantor to co-sign the rental agreement.
What to Do Before Breaking a Lease
Unfortunate financial situations happen that may have you considering terminating your rental contract. If you're in this situation, then it's important to know what steps you need to take so that you can better prepare.
1. Review Your Rental Agreement
Before making the final decision to break a lease, the first thing you need to do is review your rental agreement. This can help you understand the terms and conditions of your lease and determine what penalties you might incur if you break it.
Make sure you gather all necessary information about the lease length, rent amounts, deposit procedures, and stipulated penalties for lease termination as stated in your contract agreement.
2. Understand the Costs
If you’re considering breaking a lease in Canada, there are often expensive associated costs. This can include penalties for early termination, such as rent payments until the end of the lease or charges for damages caused to the property. Before breaking the lease, factor in these costs, whether or not you end up settling on a new rental with a different landlord.
3. Consult with Your Landlord
Breaking a lease can have serious consequences, so make sure to have an open and honest conversation with your landlord before making any final decisions. You can inform your landlord of your current situation and try to work out a solution together.
If you can't come to an agreement and still wish to terminate your lease, you may be able to negotiate a reduction in the penalties you would have otherwise been responsible for.
4. Complete the Required Legal Steps
Before ending your tenancy early, you'll need to complete some legal formalities that may differ from province to province in Canada. This may include providing a notice of termination, paying your rent in full, fulfilling any remaining obligations, and conducting the final inspection of the rental property with your landlord or representative.
What to Do If You’ve Broken Your Lease
Even if you take all of the necessary steps to prevent breaking a lease, there are times when the inevitable happens. Here’s what you can do to mitigate the damage of breaking a lease.
Explain to your landlord why you’re breaking the lease. If you have a legitimate reason, your landlord may allow you to terminate it without any legal intervention.
Negotiate an early termination fee and ask your landlord to either lower the cost or waive it altogether.
You can try to find a sublet or replacement tenant that can take the rent burden away from you.
Work out a repayment plan with your landlord to avoid having the debt reported to a credit bureau.
Keep Your Lease With the Help of iCash
If you’re worried about breaking your lease due to a financial emergency, iCash can help. Whether you need to cover rent, late fees, or any other expenses related to your lease, you can get instant approval for a cash advance loan to cover the cost. Apply online through the iCash website or via the mobile app and get funded within minutes.