How One Extra Bedroom Cost Me Double Digits on my Credit Score

Read the Article

Is it just me or is window shopping for a new apartment really fun? There’s something refreshing about envisioning your life in a new space, new part of town, different commute. It can make you start thinking about your current living situation and how you might improve it (even if yesterday, it didn’t seem to need improving).

A few years ago I was living in a cramped one-bedroom apartment, with my huge, loveable, bear of a dog, Murani. Since it was just the two of us, and he’s lower energy in his older years, I figured sharing the space would be fine. But one day I was browsing through a real estate app and came across this amazing apartment. It had a walk-in closet, an updated kitchen (gas stove!), hardwood floors, and most importantly: an extra bedroom. I had been thinking about finding a place with more room ever since my niece and nephew had a sleepover in my living room and I woke up to Murani practically sleeping on top of them. An ad for a one bedroom apartment felt like a light bulb went off: it was time to move.

The best part, it was within my budget! It seemed too good to be true! And it kind of actually was. In order to get the apartment, I was going to have to break my current lease, and the new rental company would have to run a hard credit check. I went for it because that extra space was calling my name, but it ended up costing me double digit points on my credit score, which took over a year to recover from. Who knew?!

More time and money spent at Homegoods, sure, but I never thought that upgrading my living situation could end up hurting my credit score! If you’re thinking about rushing out of your old apartment, hit pause for one minute. Here are three things I wish I would have kept in mind before jumping too quickly.

Breaking a Lease has Lingering Impacts

Signing a lease essentially means that you’re making a pact with the owner of the apartment that you won’t leave before a fixed amount of time and that you will pay your rent on time each month. Understandably, if you back out of this agreement, your landlord will likely be upset because it means their guaranteed income is now uncertain, and they’ll have to find another tenant ahead of schedule. Whether you’re moving for school, a new job, or just a better space, you’ll need to work with your landlord to cleanly break your lease without them taking legal action (which could end up damaging your credit score – more on that below).

Start by reviewing your initial lease, which likely has a lease break clause that details the process and amount of money you will owe for leaving early. Typically most lease breaks will include a flat fee for termination or will require you to pay the remaining amount of rent until your lease ends (which can be a HUGE sum of money). Plan to meet with your landlord and explain your situation. You might be able to reach an agreement with them about how much you need to pay to break the lease and make a clean exit.

Once you know how much you owe, make sure you follow through on the payment. Otherwise, your landlord could hire a collection agency to go after the outstanding balance you owe them. They could also file a lawsuit in small claims court to collect the debt, which would require you to either pay the debt or fight the amount in court.

Either way, both of these scenarios will likely show up on your credit report and could really hurt your credit score. Not sure how to check your credit score for free? Check it with Turbo, and look for the section on your credit report for public records, which can include bankruptcy, court actions related to debt, and tax liens. Each respective record has their own time frame of when they are removed from your credit history, but it can range from seven to fifteen years. Public records severely hurt your credit score, so you’ll want to do what you can to avoid these situations.

The third option after a messy lease break is your landlord could report the delinquent payments to the credit bureau, which would show up directly on your credit report. This note will remain on your credit report for seven years, even if you make all your payments on time and are otherwise the perfect borrower.

So now that you know breaking your lease means more than just moving your stuff out early, just remember: pay your bills before you leave so your credit doesn’t suffer!

Think Before You Co-Sign on the Dotted Line

When you co-sign a lease for or with someone, you are agreeing to be equally responsible for all of the payments owed on the apartment. That means if your co-signer falls behind on payments or decides to leave early, you will still be responsible for all of the apartment fees.

This can indirectly affect your credit history. If your roommate defaults on a payment, that default will show up on your credit history, too. Luckily, I know exactly what to expect from Murani every month for his “share” of the rent (he’s lucky he’s cute!), but be sure you trust your co-signer so you’re not caught in a tough situation later.

Nice and Not-So-Nice Credit Checks

Most rental applications today require you to consent to a credit check to be considered as an eligible renter. This gives the apartment owner or listing agent a high-level look at your financial history, basically to see if you have a good track record for paying your bills on time. But the interesting part about a credit check is that, depending on the nature of the check, it’s possible it might lower your credit score – not ideal.

The kind of check you want to try and avoid is a hard credit check. This happens when a lender pulls your previous credit history to see if you are qualified for lending. Now, these types of credit checks are typically reserved for big purchases like buying a home or a car, but a landlord or listing agent does have the power to run a hard credit check if you have already consented to the check. The inquiry is temporary and will be automatically removed two years after the date it first appeared. Also, depending on how many hard checks you already have, the impact can be minimal.

The good news is that the overwhelming majority of credit checks for apartments are soft credit checks. These don’t hurt your score and are more of a routine credit check. Even when you check your credit score yourself, a soft inquiry is triggered. But don’t worry: soft inquiries won’t show up on the credit reports potential lenders request to evaluate your creditworthiness. Since these reports are designed with transparency, you can always get a copy of your credit report to see who has conducted a soft inquiry on your credit report.

Pro tip: before consenting to a credit check, be sure to get clarity on which type of check they will run. You don’t want to be surprised after the fact to find that they ran a hard check. If you’re uncomfortable with them doing a hard check, be sure to inform the landlord or leasing agent beforehand. While this may end up jeopardizing your ability to get the apartment, it could be better than getting a mark on your record.

If you keep these things in mind before moving on to bigger and better apartments, your credit score should survive intact, just don’t burn your credit score on moving costs!