What Is a Credit Reference? Everything You Need to Know

Credit references are documents that describe your credit history background and creditworthiness to potential lenders. You may need these if you’re looking to borrow money, like a loan, or rent from a landlord. If you’re familiar with a job resume referral, these are pretty similar — credit references allow lenders to base your credit approval off of a trusted source and verify your income.

For starters, credit references will give insight as to whether or not you were able to make payments on time, or if you have any debt. If you have a low credit score and haven’t paid off your debts in a reasonable time, your credit application may be more likely to get rejected. On the other hand, if your credit history shows that you’ve been making timely payments and paying off any debts, the lender will be more likely to approve your application.

In addition to credit reports, other types of credit references include asset documentation, financier support, and character references. If you’re planning on borrowing money in the future, it’s important to be aware of the types of credit references.

When Should You Use A Credit Reference?

When you’re looking to borrow money from a service or a lender, a credit reference is usually requested. These types of requests come in several forms depending on the situation and who you’re borrowing money from. These are the most common situations in which you would need a credit reference:

• Rental applications: When you fill out an application to rent, a landlord or property manager will almost always request a credit reference. What they’re looking for is if you’ll be able to make payments on time.
• Loan applications: Lenders often request credit references when an individual or business fills out a loan application. Providing these references will let a lender know if the applicant is in a good position to be able to pay back money that’s borrowed.
• Utility services: Prior to activating utility services such as gas, electricity, phone services, or cable, credit references are usually requested by the service provider. This lets them know if you have a history of paying your utility bills on time.

The Different Forms of Credit References

A request for a credit reference can come in many different forms. Different types are used in certain situations and all of them have varying levels of effectiveness. Read below to explore each type of credit reference in greater detail:

1. Credit Reports

Credit reports are the most commonly used credit references by lenders, landlords, and employers, and are used to track an individual’s or business’s credit history. By looking at an individual’s credit report, lenders can determine the level of risk associated with approving an applicant.

Within a credit report, potential lenders will review certain factors such as the age of your accounts, debts, and credit inquiries. Any negative signals, such as a high number of credit inquiries and a large amount of debt will be viewed as a red flag to a lender and will lessen your chance of approval.

Credit reports are the most effective credit reference type as they contain concrete information pertaining to an individual’s credit history and give insight into a borrower’s reliability.

2. Asset Documentation

Asset documentation is another type of credit reference that’s acquired through your financial institution(s) and can speak to your credit history. In this case, obtaining official documentation of a large savings account can prove the creditworthiness of an applicant.

For example, individuals who have a substantial amount of assets have a higher chance of being able to pay their bills in the case of a change in financial circumstances. This is a sign to lenders that the individual is likely to be a reliable borrower, thus having a stronger chance of an approved application. Types of assets that can be documented include retirement plans, mutual funds, stocks, and checking and savings accounts.

3. Financier Support

Financier support credit references are less common since they are only used by business, so this is a type you likely won’t need but is still good to be aware of. Similar to asset documentation, these credit references are also obtained from a financial institution.

Instead of documents of accounts, the businesses can have their lenders or investors present a statement of the capital available to the business. These documents are considered to be highly effective for approval.

4. Character Reference 

A character reference is a type of credit reference that’s obtained from previous lenders such as landlords or employers. This type of reference is used to highlight your character and responsibility, like how well you can manage tasks and submit payments on time.

Since this type of credit reference does not include specific financial information like a credit report or asset documentation, it’s not as effective. However, character references can provide additional context or explain certain things on a credit report that may otherwise seem like a red flag.

How to Leverage Credit References

If you don’t have a huge credit history or one that doesn’t look as positive, you may need backup to prove your creditworthiness. Here are some tips to make the most of your credit reference:

Check Your Credit Report 

Viewing your credit reports frequently can help you stay on top of any errors that may be reported and even fraud. Having any of these in your credit report can lower your credit score and hurt your application’s chances of getting approved. If you catch any errors, be sure to report these to the credit bureaus to solve the issues and protect your credit.

Address Negative Items

If you do have a negative mark on your credit history, find out if you can give better context to the situation while gathering your credit reference. For example, utilize a character reference as a way to illustrate your creditworthiness and explain any concerns that your credit report may show. Also, if you’re able to prove a negative mark on your credit report was a mistake, writing a letter explaining this can also show your creditworthiness.

Ask for Reconsideration

If your application is rejected, you can ask for reconsideration. To do this, send the lender additional character references and documentation that can help overturn the initial decision to deny your application. Take the opportunity to explain any factors that may have caused the rejection of your request.

Provide Cash

In some cases, if you aren’t confident about your credit reference, you can offer a larger cash down payment as collateral. This can be beneficial to you as it demonstrates your seriousness and reduces the risk a creditor takes on you. If you are a renter, it also works well to offer one to three months rent up front.

Work on Improving Your Credit

Having a bad credit score is not an ideal situation to be in, but there are ways to help boost it. Tips to improve this would be to pay down your bills and outstanding debt and make sure you do so on time.

Tips to Secure a Credit Reference Letter

Whether applying for a loan, a mortgage, or a job, credit references are likely required. Here is how you can successfully secure a credit reference letter and make sure it meets all the requirements:

Confirm the Details

Making sure you verify the reference requirements is an important step in your application. If you overlook any crucial details, you are more likely to not get accepted since you might have made less of an impact. A helpful tip is to check and see if your lender offers any templates to help in the process.

Submit a Request

Reach out to the lender you intend to request the reference from, such as a service provider, character reference, or landlord. Once they have agreed to provide you with these documents, provide any templates or other information to make sure all bases are covered with the credit reference letter requirements.

Grant Permissions

Providing permission to release your background allows a lender to look into the details of your credit report. Ensure you are aware of whether or not this is required. If so, make sure you allow authorization. Doing this ahead of time can prevent hiccups and allow the process to run as smoothly as possible.

What Does a Credit Reference Consist Of?

The content of a credit reference depends on what it’s being used for. Each situation requires different details that need to be addressed. Usually, the recipient will let you know exactly what to include in your reference in the form of a template, but if not, make sure you add the letterhead of the issuer in your letter. These are the common elements to include:

• Duration of relationship: This could mean the length of time you rented from a landlord, how long you’ve been a customer of a service provider, or how long you’ve had an open line of credit.
• Payment history details: This section informs the lender whether or not you’ve made payments on time and have paid the necessary amounts. Any late payments can be viewed as a red flag.
• Account numbers: These may be requested depending on the type of credit reference. This information makes it easy to track and verify details.
• Total payment amount: Some lenders may be curious if you have made large payments in the past and are used to making them. If you have been, this is usually a good sign that cash flow is not going to be a problem.
• Amount of debt accrued: This lets lenders know how much debt you still have to pay. If it’s a large amount, it can be a sign that you may not be able to make payments.

Sample Credit Reference Letters 

Here are some examples of typical credit reference letters. They don’t need to be super fancy or lengthy — just make sure you’re including all of the necessary information.

Example 1:

John Smith has been a customer of ours since 2010. There is no record of late payments or missing payments being filed, nor have they had to suspend any accounts due to outstanding demands.

Example 2: 

123 Organization has a line of credit for up to $300,000. The loan balance is currently $9,643. To date, all payments have been received on time and they have all been made in full. There are no records of late payments. 

How to Increase Your Credit Approval Odds

The main goal when applying for anything that requires a credit reference is to get a positive response. A credit reference can be beneficial or detrimental to achieving the results you seek. Here are some tips to make sure you do everything you can to increase your approval odds:

• Supply information in a timely manner: Sometimes there are deadlines, so make sure you submit your information before the due date so you’ll be in good standing.
• Clarify details when possible: If some red flags appear in your background history, try to provide further clarification to mitigate those details. If you have made late payments due to illness or other serious reasons, it would be a good idea to address those directly and provide applicable documentation to support your case.
• Transparency is key: Hiding any details of your credit background can cost you an approval. All information can be checked and confirmed by the lender, so avoid taking this route. The more transparency you provide, the higher the chances of a positive result. It is best to just explain something that is bad instead of trying to hide it.

Applying for and knowing the different types of credit references can seem intimidating, but having a strong credit history and strategically using credit references can make the work easier.

A key takeaway to maintain or build a healthy credit history is to make smart financial decisions, like making your payments on time. These decisions will help boost your credit score and make your credit application more appealing in the lender’s eyes.

Credit reports are the most effective credit reference but don’t shy away from other highly effective references like asset documentation. Character references, although not as effective, can be very beneficial in providing additional context to negative reports. For those looking to build a great credit history, learning how to manage your money is a great first step.