When you sign a lease, you’re typically agreeing to stay in the property on a fixed-term lease, say three, six, or even twelve months. But what happens in case you need to break the lease early? And does breaking a lease affect your credit score? 

If you break a lease early in Australia, and follow all the requirements in your lease, it should not affect your credit score - only your bank account.

Your lease should stipulate how you can leave early without any legal or credit score ramifications. Typically, this involves providing adequate notice, paying one or two months’ rent to the landlord, and even paying termination fees.

The only way that your credit could be impacted is if you left a property without following these break early requirements in your lease. This can have serious financial and even legal ramifications. 

The cost of breaking a lease early

The unexpected can happen in life, such as the loss of a job or sudden need to move interstate. Breaking a lease is not an uncommon occurrence for tenants and landlords. However, if a tenant does not go about it the right way, it can have serious implications.

Keep in mind for scenarios such as the premise being considered dangerous or inhabitable, or in instances of domestic violence, terminating the agreement early typically comes with greater leniency. This may include offering shorter notice periods, or less compensation required.   

Fees and charges

If you’re planning to break a lease early, you might be required to give a certain amount of notice, pay two months' rent and an early termination fee, or you may need to forfeit your security deposit.

Collection agency

If you're unable to pay all dues before moving out, breaking the lease can affect your credit score. Your landlord can go to a collections agency and report your payments as late or as a default. While your landlord cannot report this to the credit bureaus, the collection agency can. Adverse payment behaviour, such as payment defaults, can stay on your credit report for several years and may significantly affect your credit score. 

Legal issues

If you leave the lease without paying any of these fees, costs, or rent, your landlord could use a collection agency to collect any unpaid amounts. Your landlord could even take the case forward to your state or territory’s department of Fair Trading. This may be further escalated to court, with the landlord potentially suing you for the lost income. If you lose you may have to pay the dues and court costs.

Tenancy ‘blacklist’

Breaking a lease could create issues when you're looking to rent in the future, if you fail to make the required payment as stipulated by the lease. A future landlord could contact previous landlords or check your rental history, and any mention of a broken lease could make you appear as a high-risk tenant, putting the rental application at risk.

Further, if the amount you owe a landlord is greater than your bond, you may be added to a tenancy database, commonly known as a ‘blacklist’. Private companies may maintain these databases, and are paid by landlords to advise when applicants are considered risky.

Do landlords run credit checks?

In Australia, some landlords, property managers or any real estate agency can run credit checks on the credit history of the tenants applying for the property. This is part of their due diligence to ensure they’re leasing out their property to applicants who are not likely to miss rent payments - as indicated by a credit file showcasing a history of poor payment behaviour. 

Typically, this will be a ‘soft’ credit check, meaning it will not show up on your credit history or affect your credit score. For anyone to perform a ‘hard’ credit check on your credit file, you must give explicit permission. Hard credit checks can be reflected on your credit file, with multiple at once typically resulting in a lower credit score or a higher chance a landlord or credit provider will reject your application.

Before you apply for a new lease, it may be worth ensuring your credit score is what you think it is. Meaning, if you haven’t checked your credit score in a while, it may be time to double check you’re in a healthy range.