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?

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• Randolph D. Nordby Executive in Residence in Finance and Real Estate, in the Kogod School of Business at the American University
• Chandrea Hopkins Professor of Economics at the College of Lake County
• Latha Ramchand Dean and Professor of Finance in the C. T. Bauer College of Business at the University of Houston
• Daniel Roccato Adjunct Professor of Economics and Finance at the University of San Diego
• James Estes Professor of Finance in the College of Business and Public Administration at California State University San Bernardino
• Anthony D. Macari Professor of Finance at Sacred Heart University
• Billy L. Carson, Edana L. Nail and Jodi P. McCrimon Instructors in the Business Division at Itawamba Community College
• Ramon Degennaro Professor of Banking and Finance in the Haslam College of Business at the University of Tennessee
• James Vogt Lecturer in the Charles W. Lamden School of Accountancy at San Diego State University
• Sharon Lassar John J. Gilbert Endowed Professor and Director of the School of Accountancy in the Daniels College of Business at the University of Denver
• Daniel Huerta-Sanchez Global Scholar, Assistant Professor of Finance, Department of Finance, School of Business, College of Charleston

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. Chandrea Hopkins Professor of Economics at the College of Lake County What types of credit references are most important to lenders? There a few criteria for credit references that are important to lenders (in addition to credit scores). They are:

• Length of time on a job;

• Repayment history;

• Length of time at an address.

When, if ever, do character references help prospective borrowers? Character references, as defined as a "letter of recommendation" on loan applications, are usually reserved for the housing market. Are credit references (excluding consumer credit reports) more important to consumer or corporate lending? The debate as to whether or not credit references are more important to either consumer or corporate lenders is a function of the type of credit extended (i.e., big-ticket items, small business financing, or home improvement), as well as other demographic factors. Latha Ramchand Dean and Professor of Finance in the C. T. Bauer College of Business at the University of Houston What types of credit references are most important to lenders? Trust is an intangible asset that is critical to the long-term success of any business. Trust is critical to the creation of financial value. Good character and strong values of the people in an organization are critical to the generation of trust. These factors become especially important when borrowing and lending decisions are made. Bankers sometimes use the phrase “Character Lending” to describe the importance they place on character and character references. While borrowers must meet underwriting and credit standards, the character and values of the management team are equally important in determining the soundness of a loan or investment. Are credit references (excluding consumer credit reports) more important to consumer or corporate lending? Credit references, credit reports and background checks are useful prior to starting a business relationship. While corporate lending appears to rely more on the company financials, on the industry and economy, the values and character of the management team play an important role in framing the decisions and business model that a corporation adopts. This, in turn, determines the success of the business. In short, character matters, and references can be useful no matter what the scale of lending. Daniel Roccato Adjunct Professor of Economics and Finance at the University of San Diego What types of credit references are most important to lenders? Your credit report has now become your financial passport. While other references may come into play, a credit report carries the most weight. When, if ever, do character references help prospective borrowers? Lenders may consider a character reference in the case of marginal borrowers or someone with a very short credit history. A good example might be a recent medical school graduate or immigrant. But for most big lending decisions, like getting a mortgage, a character reference is not enough. James Estes Professor of Finance in the College of Business and Public Administration at California State University San Bernardino What types of credit references are most important to lenders? If we are talking about individuals or companies that may be individually listed as references, they would be valuable only to a lender that had an existing and solid relationship with that individual or company providing a reference. Simply put, you would not provide a reference that would not provide a favorable recommendation, so using an independent rating or credit score is unbiased. The rating or score is an algorithm provided by a credit bureau for individuals, or credit rating agencies for companies, and is the preverbal credit score. The credit score is acceptable because it can be commonly defied and quantified, as compared to a written reference if we are referring to a "credit reference.” The accountability remains with the approver and is always subject to second guessing with hindsight, so the safer path is to use an independent and collective rating or score. Anthony D. Macari Professor of Finance at Sacred Heart University What types of credit references are most important to lenders? The most important types are references for similar types of loans. For example, the best reference for a car loan is a previous car loan. Also, it gives lenders comfort if you have been able to pay off a larger loan than the one that you are asking for. When, if ever, do character references help prospective borrowers? In peer to peer lending (such as microfinance or similar non-traditional loans) they are very important, as studies have shown that borrowers are more likely to repay in a lending community comprised of friends and associates. It would be surprising if character references in traditional lending environments place much weight on them, unless they have a prior relationship with the person/organization making the reference. Are credit references (excluding consumer credit reports) more important to consumer or corporate lending? In corporate lending there are many more ways to limit exposure, as well as place continuing reporting/monitoring requirements on the borrower, so I would say more important in consumer lending. Also, in many cases, corporations will secure their loans with specific assets of the borrower. Billy L. Carson, Edana L. Nail and Jodi P. McCrimon Instructors in the Business Division at Itawamba Community College What types of credit references are most important to lenders? Other credit card accounts, including store cards, in-house consumer installment payments, open, but unused accounts. When, if ever, do character references help prospective borrowers? Unfavorable character references can diminish a customer’s creditworthiness. However, even favorable character references will not erase unfavorable data. Are credit references (excluding consumer credit reports) more important to consumer or corporate lending? Yes, depending on the size of the balances involved, the frequency of transactions, and the stability of payments. Credit references are more important with regards to consumer lending, since corporations are already established companies with government-provided EIN numbers and recorded documentation and registrations. Ramon Degennaro Professor of Banking and Finance in the Haslam College of Business at the University of Tennessee

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

They matter, but not nearly as much as a good credit history and profile. If you have a track record of paying your bills, a good work history, and assets to back the loan, then character references won’t matter. If you don’t have a good track record of paying your bills, or a good work history, or any assets to back the loan, then character references won’t matter, either. Between those extremes, they might help at the margin.

James Vogt Lecturer in the Charles W. Lamden School of Accountancy at San Diego State University

What types of credit references are most important to lenders?

The single most common, and most important, credit reference for individual borrowers is the credit bureau report. This credit report contains a detailed history of an individual’s credit accounts and payment behavior. For most lenders, this detailed accounting of credit and payment behavior is the best available prediction of how an individual will handle credit in the future, as it indicates the total amount of credit the individual has available, how much he or she has used, and how well the individual has made payments on time.

The term “credit reference” can also refer to the individual credit accounts contained in the credit bureau report. In other words, the credit bureau report is made up of all of the histories for individual accounts. So, if an individual is said to have “insufficient credit references,” this typically means that there are too few individual credit account histories to provide a meaningful basis for a prediction of credit and payment behavior.

For more substantial loans, such as a home mortgage, a personal financial statement is also important. A personal financial statement, or statement of net worth, is a listing of all of the things an individual owns (assets) and the amounts that an individual owes (liabilities). An individual’s “net worth” is the total value of these assets minus the total amount of liabilities (amount owed). For lenders, an individual’s net worth is a good indication of a person’s ability to repay borrowed amounts.

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

Character references have limited value, but may be valuable in specific situations, such as when an individual has insufficient or no credit history, but may have other factors that might be meaningful. For example, a graduate student or doctoral candidate, with a strong history of academic success and a promising career on the horizon, may benefit from a strong character reference. However, most lenders rely largely on credit bureau reports for credit decisions.

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

Other than the credit bureau reports for individuals mentioned above, other types of credit references are typically far more valuable to business lenders. There is less availability of business credit histories, so a strong reference from a supplier or vendor (often called trade references), indicating a business’s credit and payment history with that vendor, can be very important.

Sharon Lassar John J. Gilbert Endowed Professor and Director of the School of Accountancy in the Daniels College of Business at the University of Denver

What types of credit references are most important to lenders?

Credit references that show a borrower’s ability to make timely payments are important. Borrowers that make payments without a creditor having to send late notices or pursue other costly collection activities result in profits to the lender.

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

Character references can help prospective borrowers who do not yet have a credit history. When I bought my first car, the local savings and loan that lent me the money asked for a reference from my employer. I did not have a borrowing/repayment history and the lender wanted some indication that I was reliable. Reliability in making payments is key. In today’s environment, it is easy to establish reliability.

For example, a worker who has a standard commute can predict the amount of money she will spend on gasoline each month, open a credit card with the fuel company, and set up automatic payments from her bank so that she never misses a payment. When fuel prices and driving habits hold steady, the automatic payment will closely approximate the balance, even if the driver forgets to check her bill from time to time. One could do the same thing with a bank credit card like a general-purpose Visa tied to one’s checking account, except that consumers might find it too tempting to use a bank credit card to make impulse purchases. Psychologically, it might be easier to only use a credit card to purchase gasoline if the credit card is emblazoned with the name of your regular gas station.

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

Credit references are important for both consumer and corporate lending. Some new corporations are able to borrow money only with personal guarantees made by the corporation’s owners. Therefore, in order to start a business where credit is needed, it may be important to first establish good personal borrowing practices.

Daniel Huerta-Sanchez Global Scholar, Assistant Professor of Finance, Department of Finance, School of Business, College of Charleston

What types of credit references are most important to lenders?

For individuals, the most relevant credit references are credit reports from the large credit bureaus since they are standardized and easy to process by most credit-granting institutions. However, credit references from prior lenders are very valuable when credit has been extended for commercial purposes and when a loan has not been reported to the large credit bureaus. The information about the borrowers' capacity to make timely payments over extended periods helps underwriters determine creditworthiness and to somehow quantify the risk of extending credit.

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

Character references may help borrowers when their credit history is short, when they have recently changed employment, or when they have recently relocated. However, character references are usually secondary sources of creditworthiness information for underwriters.

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

Credit references (excluding consumer credit reports) are usually more important to corporate lending compared to consumer lending. Credit bureaus do a thorough job in compiling individuals' credit references but, for businesses, credit reports may be incomplete. For businesses, letters from credible sources that explain business-to-business dealings and private agreements reveal important and useful information to establish creditworthiness for a company.

 

Image: Belfer/iStock.

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