Credit Reference

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.

How a Credit Reference Works

A credit reference is generally used to determine the creditworthiness of a person or individual. Credit agencies are used most often for this purpose, though 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's or business’s past history.

Key Takeaways

  • Credit references provide information to potential lenders about the creditworthiness of an applicant.
  • Landlords who rent apartments or houses often ask applicants for credit references.
  • A credit report is an oft-used type of credit reference.
  • Businesses use credit references along with trade references (references from suppliers, for example) when applying for lines of credit.

Click Play to Learn the Definition of a Credit Reference

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.

Credit Reference and Credit Scoring

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.

In some cases, lenders may request only reference contacts with the references being called by the lender during the underwriting process.

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. In addition, each of the three nationwide credit reporting agencies (Equifax, Experian, and TransUnion) are required to provide you with a free copy of your credit report every 12 months upon request. These reports will provide more detailed information.

For those willing to pay for some additional peace of mind as well as helpful features and tools, there are several excellent credit monitoring services that are also worth considering.

Special Considerations

Lenders require a credit reference letter when requesting individual credit references. 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 within its home country.