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Breaking a lease won't appear on your credit report, but this is when it could really hurt your credit

If you're relocating or can't afford your rent, you may have to break your lease. CNBC Select speaks to an expert about when breaking a lease could affect your credit score.

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There are a handful of scenarios that may cause you to break your lease. Perhaps you need to relocate for a new job opportunity or you closed on a home before your lease ended. And like many Americans who've been financially impacted by the coronavirus pandemic — you might be thinking about moving right now if you're struggling to pay rent.

Just this month alone, nearly 20% of Americans couldn't make a full or partial rent payment by the sixth day of the month, according to the National Multifamily Housing Council (NMHC)'s Rent Payment Tracker

If you find yourself needing to break your apartment lease amid the coronavirus outbreak, the good news is that a broken lease, in itself, won't appear on your credit report. But if you have any unpaid debt with your landlord, this may put your credit in danger.

Below, CNBC Select speaks to an expert about when a broken lease could hurt your credit, ways to prevent it and tips for renters.

When a broken lease could hurt your credit

Unlike a mortgage, your payment activity on your apartment lease doesn't get reported to the three main credit bureaus (Experian, Equifax and TransUnion) by your landlord (unless you request it specifically to build credit). But if you still owe money on your lease when you break it, your landlord could report the unpaid debt to a collection agency.

"Breaking a lease could impact your credit report and credit score if you don't pay all of the associated fees due," Roger Ma, a certified financial planner at lifelaidout® and author of "Work Your Money, Not Your Life," tells CNBC Select. "In that situation, your landlord could report your uncollected debt to a collection agency, who may notify the credit agencies."

According to Experian, "Having an account in collections on your credit report will have a significant negative effect on your credit scores."

Unpaid debt on a lease can not only negatively impact your credit, but it can make it difficult to qualify for a lease on a new apartment. Most landlords check applicants' credit during their approval process and a history of unpaid debt from a broken lease may not reflect well on you.

How to prevent a broken lease from hurting your credit

Since most collections remains on your credit report for up to seven years, it's important that you do all you can to prevent them from getting there in the first place — especially since your credit score worsens the longer that unpaid debt sits on your report.

When breaking your lease, consider the below advice from Ma.

"As long as you pay the required termination fees, any fees for damages to your apartment and are up-to-date on your rent, there would be nothing for your landlord to report to the credit agencies," he says. 

It may sound easier said than done, but the best way to make sure your credit doesn't take a hit is to pay all the applicable termination fees that are due when breaking a lease. These fees vary widely, so to minimize the damage you can follow the guidelines below.

Tips for renters

To make sure that you pay all the outstanding fees and charges on your lease before moving out, here are some tips that may help you cover the cost. 

What to consider when breaking your lease:

  • Before you do anything, read over your lease contract. "Most of the time, there are provisions in the rental agreement that spell out the costs associated with breaking your lease," Ma says. "In New York City, a typical provision may be to pay two months rent or the remaining rent due, whichever is less." It's important that you confirm with your landlord that they have the same one on file so you both are referencing the same terms.
  • Talk to your landlord. Once you know what fees are involved with breaking your lease, speak with your landlord about your current situation. They may already have a financial hardship plan in place for tenants affected by the coronavirus pandemic, so be sure to mention any job or income loss you've experienced. Whether your agreement states a 30- or 60-day notice or a penalty fee, it's worth negotiating. "In some cases, you may be able to negotiate these fees with your landlord, especially in the current situation," Ma says. Relief options from your landlord could maybe include breaking your lease without a penalty fee, being able to still receive your security deposit or setting up a payment plan to reduce the cost of rent for a set amount of months until you are back on your feet.
  • If you and your landlord come to a revised agreement, make sure to have it in writing. For this reason, it may be best to communicate over email or have the agreement written up and confirmed over email.
  • Propose a new tenant to replace you. "If you're able to help your landlord find a new tenant, they may be more open to negotiating or lowering your termination fees," Ma says.
  • Find a sublet. It may be difficult to find a permanent tenant that can sign a new lease entirely, but a sublet may be an option. If you know someone who would sublet your space, this could be an easier way to get out of your lease early. Just remember that even when you sublet your apartment to someone else, you are usually still responsible for any rent that goes unpaid (since you are technically still leasing from your landlord and your sublet is leasing from you).

Why you want to maintain a good credit score

Breaking your lease may be the best solution for your current situation right now, but it's important you make sure to protect your credit score no matter what choice you make.

It may not seem necessary now, but a good or excellent credit score can help you go far in the long run. Healthy credit scores can qualify you for lower interest rates on loans and some of the best credit cards.

For example, the Blue Cash Preferred® Card from American Express ranked as our best grocery rewards credit card but requires good or excellent credit to qualify. Cardholders receive 6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% back on select U.S. streaming subscriptions, 3% back at U.S. gas stations, 3% back on transit and 1% back on other purchases. Terms apply.

The Citi Double Cash® Card ranked as our best no-annual-fee credit card and requires applicants to have good to excellent credit. Those who qualify will be rewarded with 2% cash back (1% on all purchases and an additional 1% after you pay your credit card bill). (see rates and fees.)

Make decisions today with your long-term finances in mind, and your credit — and wallet — will thank you later.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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