What is a Credit Reference: Things You Need To Know
In a world where everything revolves around money, having a good credit score is a must. While your credit report is one of the best credit references you have, there are still other types of credit reference to consider. Credit references are there as guides if you are a good borrower, and there are a lot of credit reference options to choose from. Get to know everything about credit references - what it is, the types, and some practical tips on how do you ensure you’ll get a positive response from creditors.
What is a Credit Reference?
As defined by Latha Ramchand, provost and executive vice chancellor for academic affairs at the University of Missouri, "A credit reference could be from any entity that is able to speak to the creditworthiness and credit history of the borrower. It could be your credit card company, past or current lenders a utility or telephone company.”
If you’re a seasoned borrower or not, you might have heard of credit references in one way or another. The business of lending money is always risky and lenders must ensure they have some people to contact just in case something bad happens. Although there are methods on how to reduce the risk, a credit reference is one of them.
As mentioned, credit references come in many forms such as a credit report or documented letter from a previous lender, personal acquaintance, or business acquaintance. Lenders use both credit reports and credit reference letters in their lending decisions for both individuals and businesses.
When do you need credit references?
Credit references are requested when certain individual requests to borrow money from a lender or to use a service. There are several situations when a credit reference may be requested. Some of the most common situations include:
All loan applications require credit references
When an individual or business applies for a loan, lenders always require a credit reference. These credit references let a lender know whether the applicant will pay back the money that has been borrowed.
Rental applications may require character references
Landlords often request a credit reference with rental applications. The information presented on the credit reference such as the credit history allows property owners to determine if rental applicants will make timely payments.
Credit references are also often requested for utility services such as electricity, gas, cable, or phone services. Companies that provide these services may require a credit reference prior to activating accounts. A credit reference is needed to determine whether you have a history of making timely and appropriate payments for similar services.
How Does a Credit Reference Work?
Firstly, a lender or creditor requests a letter or any other form of credit reference. These companies use this as a factor of getting loan or credit card approval. The borrower must act on this for faster approval.
Then, you can check whether the lender has instructions for a credit reference and see what are the specific things they need to appear and see in the letter. The creditor or lender might have a sample or template letter to follow, and a list on what to cover in the credit reference.
The key is to know what information is required and ask for clarifications or questions from the creditor. A quick call or e-mail is recommended.
Lenders have specific criteria for the perfect credit reference provider, and it is important to ask what exactly they want. Credit references can be credit providers like banks, credit card companies, utility company or auto loan financing firms.
The key is to act on your credit reference requirements fast
In line with data privacy, the borrower must permit with releasing of personal information. Written permission from the borrower is asked by the lenders to officially release personal data. Most credit providers like banks and credit card companies already have these data but permission to release them from you is needed, otherwise, it is considered a privacy breach.
Creditors do this to clear out what the credit reference provider needs, authorize and give a go signal to release your personal data as needed. On some occasions, they can choose not to release your data and therefore, not acting as a credit reference.
If the credit reference agreed to release the information, make sure everything is covered in the documents. Just to be sure, include the payment history, especially if you are dealing with auto financing firms and credit companies as creditors. Things like relevant account numbers you hold, the time period you’ve been connected to the credit company are also included as other information you'll be including in your credit reference documents.
If you have proven to be a good credit risk, accounting all payment history, account numbers, and length of relationship are generally considered good indications and must need to be included in your credit references.
What Is a Credit Reference Letter?
A credit reference letter is a document that describes your payment history with a business you've worked with previously. Recipients use the credit reference letter to learn more about your finances and decide if it's appropriate to offer you credit.
The same with cover letters when applying for a new job, credit reference letters typically provide details about your account, such as the length and the type of services you've used.
If the borrower has a history of late or behind payments, the letter should also include that information. Anything, may it be good or bad information is included in the credit reference letters.
How does a Credit Reference Letter Work?
These credit reference letters are from your previous credit providers to your new or prospective creditors or lenders. A credit reference letter can help you get approved for services based on your history with other service providers.
It is good to maintain a good relationship with creditors such as paying on time as they can be future credit references. If these creditors vouch for you, the new or prospective lender can be comfortable extending credit.
The other name for this is "letter of good credit" or "letter of good standing."
Types of Credit References
Now that you know what a credit reference is, it is essential to know its different forms or the credit reference types to know which one is best for you. While your credit report is the ultimate credit reference, there are still others you need to consider. Get to other types of credit references you might want to use.
Asset Documentation as Credit Reference
There may be investment accounts not listed in your credit report. Your own asset managers and brokers can make a credit reference to document your assets. This process also helps you to quantify your net worth and support how credit-worthy you are as you apply to credit companies and lenders.
Businesses in need of credit references regularly use financier support as a solution. The support from investors and shareholders could also help create a credit reference. The available capital backing your business could help prove your creditworthiness.
Personal Character References
The most common and easiest thing to do is to look for people that can justify your creditworthiness. As the last resort, you could also appeal to the emotional side of your lenders. Personal references from friends, family, and co-workers could also serve as credit references or character references. These statements could attest to your character and values, which may confirm your creditworthiness. It could also help explain any discrepancies in your financial history. However, this credit reference method is unfortunately not too effective. It may help to serve your cause, but lenders don't rely on it too often.
Which Type of Credit References Should I Use?
Those are the methods that could help you submit successful credit references. You can always use a combination of these methods to improve your application's likelihood of success. Use it wisely to cover every criterion required by your lender.
It is best to note that you must ask what type of credit reference your lender or creditor requires from you.
How to Improve Your Chances for a Positive Response
The goal of a credit reference is to make an application successful. Here are some practical tips on how to increase your chances of getting a positive response.
Know the Required Information for Your Credit Reference
The lender requires a specific set of information for a reason. Firstly, get to know the required criteria. Make sure everything is included in the contents of your credit references.
Act Fast and Submit it Timely
No one likes to wait when there is money involved. Ask your lender by when they need your credit references and supply the credit reference requirements within the expected timeframe.
Justify Any Discrepancies
When you’re lucky, a perfect credit report is a plus. But only a few people have that privilege. If you happen to have some issues with your own credit report, you could always use the credit references of your service providers to explain any issues with some context. A well-constructed explanation could help improve your chances of success.
Honesty is the Best Policy
Honesty is always the best policy. Be honest and transparent about your situation and be open about your credit references to state the case as it is.
Credit Reference: In Summary
Credit references are tools to justify a person’s creditworthiness. Creditors and lenders to reduce the risk in the money lending industry. The ultimate goal of a credit reference is to increase the borrower’s chances of getting approved for a product. It is very essential to know what the creditor wants in order to get a positive response and supply them ASAP.
If you’re someone who wants to improve your credit score, check out our post about it. Need more help about how a credit reference works? Consult our credit repair experts for free here at CreditPlanned.