What is a 'Credit Reference'

Credit references can be 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.

BREAKING DOWN 'Credit Reference'

Credit references are generally used to determine the creditworthiness of a person or individual. Credit agencies are used most often for this purpose, although individual letters of reference are sometimes necessary. With a credit reference letter the entity has no obligation or association with the loan. The reference letter serves only to provide examples of the individual or business’ past history.

Credit Report

Credit reports are the most reliable form of credit reference. Credit reports include detailed line items on the borrower’s credit history, the number of credit accounts a borrower has open, the number of accounts a borrower has applied for, and any delinquencies or defaults. Credit reports will also include information on other credit items specifically bankruptcy or tax debt. Additionally, a credit report will include a credit score that is generated by a credit reporting agency. Credit reporting agencies use various methodologies for generating credit scores. Lenders will usually require a specific credit score level based on their underwriting standards for loan application approval.

Situations beyond standard credit account approvals may also require a credit report. These requests may be in relation to employment, apartment rental agreements or insurance quotes.

Credit Reference Contacts

Most often a lender will require a credit reference letter when requesting individual credit references. In some cases, lenders may request only reference contacts with the references being called by the lender during the underwriting process.

Credit reference letters are often requested in business loans. Generally, a credit reference letter must include information on the reference such as the name, relationship and any details pertaining to past credit history.

One example of the need for credit references might include an overseas business wishing to establish its credentials in the United States. This business may obtain a number of credit references from other businesses, banks, vendors and customers that it has dealt with in its home country.

Credit Reference Considerations

Individuals may be asked to provide credit references in a variety of different situations. Having a strong awareness of potential individuals or businesses that can be contacted as a credit reference can be helpful in expediting a credit reference process. Individuals should also monitor their credit report activity to remain aware of any changes or additions that might affect their credit score. Credit card companies offer free monthly credit score reporting which can also be a good way of following and tracking an individual’s credit score.

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