Posted by: John S Kiernan

A “credit reference” is a document that attests to the creditworthiness of a prospective borrower or rental applicant. The most common type of credit reference is a credit report, as it chronicles an individual’s or business’s credit history. And the most notable credit reports are those from TransUnion, Equifax and Experian. You can check your TransUnion credit report for free on WalletHub.

A credit report isn’t the only type of credit reference, though. The term can also refer to the individual accounts on your credit report. For example, someone with no prior credit history may be deemed to have “insufficient credit references.” And that just means there are too few data points for the lender to assess his or her creditworthiness.

A letter from a credible source that speaks to an applicant’s financial trustworthiness would also qualify. This type of credit reference isn’t likely to help individual borrowers very much, except maybe for situations involving small neighborhood banks and credit unions, which are more likely than national lenders to value personal relationships. But it plays a big role in corporate lending. This includes business-to-business credit arrangements, where a borrower’s history is less readily available and the voucher of a trusted source – such as a vendor with whom the business has previously worked – is thus more meaningful. In this context, a credit reference may also be called a “trade reference.”

Below, we’ll explore credit references in greater detail, explaining the most common types of credit references and when they’re most effective.

Types Of Credit References

Credit references come in all shapes and sizes. They’re also used in many different circumstances and boast varying levels of effectiveness. Below, you will find a breakdown of the most common types of credit references as well as how influential you can expect each to be.

Reference Type	Explanation	Level of Effectiveness
Credit Report	Your major credit reports are the most important credit references. They serve as the basis for all credit scores and are used in all lending decisions. Credit reports also can play a role in employment decisions, tenant screening and insurance quoting.	High
Asset Documentation	Your money and other assets speak volumes to lenders. So proof of their existence can serve as an excellent credit reference. Lenders aren’t going to take your word for anything, though. You’ll have to ask your financial institution(s) to send records on your behalf.	High
Financier Support	Similar to a statement of assets, a company can use a statement from investors and other financial supporters to illustrate the availability of capital.	High
Personal Character Reference	Applicants often attempt to appeal to the emotions of underwriters with letters from friends, family members, employers, etc. Such letters may attest to the character and responsibility of the applicant or lend context to elements of one’s financial history that could give a lender pause.	Low

 

Credit Reference Tips

Simply submitting a credit reference won’t necessarily do much for you. It needs to make a positive impact, and a lot of different factors contribute to that. The following pointers will help you cross all the t’s, dot all the i’s and ultimately improve your approval odds.

• Monitor Your Credit Report & Score: Your credit report is the most powerful credit reference there is. So it should receive the bulk of your attention. Making sure it’s error- and fraud-free is a great start. But you should settle for nothing less than “excellent” standing because that’s what will get you the best terms and open the most doors. People with excellent credit save thousands of dollars on annual mortgage, auto loan, credit card and car insurance payments compared to folks with limited or fair credit. If you’ve signed up for a free WalletHub account, you’ll receive daily updates to both your credit report and credit score as well as personalized credit-improvement advice.
• Don’t Waste Your Bullets: You can only go to the well for references so many times with most individuals and organizations. That means you need to pick your spots. Save the best references for the highest-dollar situations, such as a mortgage or an important business loan. And use other means to improve your chances of getting approved for a credit card, for example.
• Use References To Explain Shortcomings: References can help lend context to any red flags that may exist in your financial past. It’s basically the same principle as using a personal statement on a college application to explain a suspension, or a doctor’s letter to explain a period of unemployment. But the infraction in question could be a collection account, tax lien or foreclosure.
• Send References With A Reconsideration Request: Few people realize it, but there’s actually a procedure for asking a lender to re-evaluate your application. And documentation of extenuating circumstances could help improve your chances of winning on appeal, so to speak.
• Choose Trade References Wisely: A business generally needs at least three trade references, preferably from its biggest suppliers. It’s also good if your business’s references have good references.

For more information, we recommend checking out our Education Center, which is filled with helpful articles on all aspects of the credit-building process. Registering for a free account will also unlock the power of daily credit score updates, unlimited credit report access, 24/7 credit monitoring and customized credit-improvement advice.

Ask The Experts: Assessing The Effectiveness Of Credit References

Credit references are characterized by variety. Myriad types exist and the impact of many is difficult to quantify. We therefore sought additional perspectives from a panel of lending experts from both the consumer and corporate sides of the aisle. You can find their bios and responses to the following questions below.

• What types of credit references are most important to lenders?
• When, if ever, do character references help prospective borrowers?
• Are credit references (excluding consumer credit reports) more important to consumer or corporate lending?

 

Randolph D. Nordby

Executive in Residence in Finance and Real Estate, in the Kogod School of Business at the American University

What types of credit references are most important to lenders?

When lenders look at credit references, it is important to understand what type of lender is reviewing your credit and what are they looking for.

For most of the situations you will encounter, lenders will look towards your credit report to answer questions about your credit history. If you are buying a new car and you are looking for financing, the financing company is most likely to review your credit report from one of the big 3 credit reporting agencies (i.e., TransUnion, Equifax, and Experian). From my experience, unfortunately, many students don’t understand how important it is to develop a strong credit history. A low credit score is likely to raise your interest rate when you go to borrow money, and may even prevent you from obtaining a security clearance for that new job, or from buying that new car or renting an apartment. I always encourage students to take a personal finance course and obtain a copy of their credit report at least once per year, to review the report and correct any errors or fix any problems that may have shown up.

Your credit report is absolutely critical to your financial health and must be both monitored and protected; it is also your most important credit reference.

Some lenders may ask for personal character references to supplement a poor credit score, or even a lack of a credit history in regard to retail clients. For business clients, it is more common to request references. Also, some lenders may ask for proof of asset documentation (i.e., a bank statement, investment statement, etc.) to supplement your loan application, having a large amount of assets is likely to lower your interest rate and improve your chances of being approved for the loan.

When, if ever, do character references help prospective borrowers?

From my experience working at large national banks, character references will not help very much in the lending decision for retail clients. For the most part, retail lenders will rely on credit reports and asset documentation for their lending decision. If you have a poor credit score, it is unlikely that a nice note from your mom will help you obtain the financing you desire.

However, if there is an issue in your past, don’t be afraid to explain how you had medical issues that resulted in expensive medical bills, or how you were downsized from your firm due to no fault of your own a few years ago, but now you have a stable job in an industry you love. From my experience, the more you explain to the lender, the more likely they will try and figure out a solution to help you. It is also important to remember that lending agencies (i.e., banks, credit unions, etc.) make their money by lending, so don’t be afraid to shop around and ask questions.

Always remember, it is critical that you understand fully the terms (i.e., APR, repayment term, due date, etc.) on any loan that you obtain. Even a 1% or 2% difference in your interest rate can be a big dollar difference over a long time period.

Are credit references (excluding consumer credit reports) more important to consumer or corporate lending?

From my experience, it is much more important to provide credit references for corporate lending. It is very common for lenders to ask for credit references from trade suppliers, big creditor’s, etc. In regard to consumer lending, credit references really are not that helpful, as most credit lending firms rely on credit reports to evaluate your creditworthiness.

   

Image: Belfer/iStock.

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