What is a credit reference? Definition and example
A credit reference, just like a job reference, is a reference from a trusted source that lenders use to approve a loan or credit application.
Depending on who provides the reference, a credit reference could well mean the difference between the applicant approved or denied for credit.
Technically, a credit reference could also come from information gleaned from a regular credit report, because these reports are the result of the evaluation work carried out by professional credit agencies, and are also very reliable by lenders and creditors.
For the purposes of this article, the focus is on external credit references that are not from traditional credit reports, but from written and verbal correspondence from credit references.
Credit references provide lenders with value that goes beyond traditional credit reports – the primary tool used by lenders and creditors to assess an applicant’s credit risk. A credit reference usually comes from another creditor, professional or personal acquaintance of the applicant, or a financial institution such as a bank or credit union.
By providing a credit reference, the referring part is not tied to the approval of a credit or loan, as a co-signer is. The referring party simply provides a letter of reference attesting to the character of a credit applicant and the ability to pay their bills on time (a business applicant may also benefit from a credit reference.)
In some cases, a phone call between a credit reference provider and a lender is sufficient to formalize and complete the lender’s credit reference request.
How does a credit reference work?
A credit reference starts with a request from a lender or creditor for a letter or other form of credit reference. Often times, a lender will notice that the credit reference could be the determining factor in getting credit approved, so the applicant should jump in and act quickly.
These actions will start the process:
Check with the lender for instructions
If you receive a request from a lender for a credit reference, check with that lender and ask them what they specifically need to see in the letter. The lender can provide a sample plan to follow, a template letter they are already using, or ask them to provide a list of specific areas to cover in a credit reference. Whatever information is required, you’ll want to know it ahead of time, which is why a call or email conversation with your lender is highly recommended.
Choose your credit reference provider
Different lenders may have different criteria for the perfect credit reference provider and again, it is always worth asking what they want. That said, any credit provider, such as a bank, credit card company, utility company, or auto loan finance company, is usually a good bet to be your credit reference provider.
Provide permission to disclose your personal information
Some reference letter providers, such as banks or credit card companies that already hold your personal data, will likely ask for your written permission to discuss or disclose your personal financial data. A financial institution also probably uses its own form for credit references, and it is also worth asking for this form. Once you are clear on what the credit reference provider needs, issue an authorization that gives the letter writer the go-ahead to disclose your personal details, if necessary. Otherwise, they can choose not to act as a credit reference.
Make sure this information is included
Most lenders and creditors will likely ask for the information they need for a completed credit reference document. To be safe, however, be sure to include your payment history if your reference letter provider is a creditor (such as a credit card company or auto finance company). Also be sure to include all relevant account numbers and the time period of your business relationship i.e. how many years you have been with a credit company, for example.
Any instances that you can prove you’re a good credit risk – and payment history, account numbers, and the length of a relationship are good indicators – should be included in your credit reference documentation.
Different types of credit references
A request for a credit reference can arise in different business scenarios.
For individual credit references
A credit reference letter or phone call to the creditor is often used for one-time credit decisions, such as a landlord requiring additional references before approving an apartment rental, or a younger financial consumer with a history of minimal credit seeking to buy a new car. Sometimes lenders just want reassurance that a credit applicant they want to approve, but don’t have enough information to do so, is a good credit risk. A credit reference can be the driving force that leads to credit approval in the above scenarios.
For commercial loans
Small businesses may have more difficulty landing a
or a business loan, even with good credit. But a credit referral from the company’s business partners, suppliers, or venture capitalists can be the push a bank needs to accept a business loan.
For international credit requests
If a credit applicant from a foreign country wishes to do business in the United States, a letter of reference (or more) may be requested by a lender before a financing approval is granted for a foreign company than a creditor does not know. Again, a good letter of reference from a business partner or funding source can turn things around and get the necessary credit approval.
For big cash loans
Credit references are particularly useful for creditors when there is more money, and therefore more risk, at stake in a credit decision. By requesting and obtaining a reference letter from a trusted source, the creditor has taken an “extra step” necessary to properly vet a credit applicant before issuing the approval.
An Individual Loan Between Friends or Family
When ordinary people get together for a cash loan, a credit reference can come in handy. Say you want to borrow $ 10,000 from a friend for a down payment on a new house. A credit check may be necessary, depending on the confidence level of the lender. But if the borrower offers a letter of reference from their bank, credit card company, or old mortgage company that demonstrates prompt payment, that credit reference might be enough to close the deal.
For electricity or other domestic utilities
Main Street consumers, especially young adults with little or no credit history, may be asked to provide a letter of credit before they are approved for gas, water, utilities, or utilities. cable and Internet in an apartment or new house. Often times, a utility or household service provider will take a letter of reference instead of a down payment before turning on the lights. This is because utility companies do not often use credit reports for service seekers, hence the need for a credit reference to secure services.
Use these tips to increase your odds
Provide additional information
Your credit reference letter must include enough data for your credit application to be approved. Just to be sure, add additional documents like tax returns (for proof of income) and any additional assets like stocks, bonds or insurance that you could use as
, if necessary.
Include a large cash deposit
If you are unsure whether your reference letter of credit will qualify you for a loan or credit, include a cash deposit offer as collateral as well. The offer will show that you are serious about showing good credit and may help you get approved.
Use alternative credit reports
Your creditor or lender has seen your FICO credit reports before, but they may not have seen all of the information you have to offer to prove your creditworthiness.
An alternative credit report can help financial consumers with no credit history build a record of credit and payments on time. Alternative online credit report services like eCredable and Experian’s
(EXPGIE) RentBureau can connect you (for a fee) and can even cancel the need for a credit reference if your payment history is strong enough.
Offer a character reference
One form of credit referral that may pay off in particular situations is a character referral. A character reference doesn’t reach the standard of a credit reference, but a carefully crafted letter supporting your good character and prudent financial habits can help you get the credit you want.
Do not ask a family member to provide one for you. Instead, ask a former college owner, a former employer who can attest that you arrived on time and put in the extra effort at work, or even a college professor who can tell you. gave good grades. Believe it or not, lenders and creditors also make credit decisions based on good ethics and solid education and professional training. Take advantage of this fact with a robust character benchmark.
Stay on top of your credit score
Keeping an eye on your credit score, especially when applying for a large loan or a new credit card, is a no-brainer. Make sure you pay your bills on time, don’t use a lot of credit cards, and review your credit report to make sure there aren’t any mistakes on it. This way, when a credit reference request is made, you will be in a good position to pass credit checks with flying colors.
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