When you apply for new credit, creditors may ask for a credit reference. You may wonder what is a credit reference and isn’t my credit report enough?
Sometimes creditors need something more than a credit report, even if you’ve just repaired your credit. They want to hear from others that you are financially responsible and a good risk before they lend you money.
Here’s everything you need to know about credit references, what they are, and how you get one to secure the funding you need.
What Is a Credit Reference?
A credit reference is a testament to your creditworthiness. It’s a document that states you are a good credit risk. Credit references can be something as common as a credit report or a written letter from someone you do business with, like a bank or landlord.
A thorough credit reference letter or report provides the most credibility. Always check with the lender requesting the credit reference and ask what they want included, but most commonly, credit reference letters include:
- Account limit (the total amount you can borrow)
- Current outstanding balance
- Payment history (did you make any late payments?)
- Age of your account
How Does a Credit Reference Work?
If your lender asks for a credit reference, it’s often a sign that they need this information to make a lending decision on your loan. Even if they did a credit check, they may want further verification that you’re a good credit risk.
When the lender asks you for a reference, ask the following questions:
- What type of credit reference do you need? They may or may not specify a specific lender or type of lender they want it from.
- Is there any specific information you need in the letter?
- Do they have a specific template you should use?
Make sure you provide the reference with your permission to release personal information. Without it, they can’t talk about your finances. Usually, a written letter suffices, but some banks or financial institutions may have a credit reference form they require.
Types of Credit References
Each creditor may want a specific type of credit reference, but here are the most common:
This is the most common and most legitimate type of credit reference. Your credit report shows your credit history, whether you have credit cards, mortgage loans, personal loans, or student loans. Each consumer has three credit reports, one from Equifax, Experian, and TransUnion. Each report shows your credit lines, payment history, balance, and overall loan performance.
Asset documentation doesn’t show your payment history, but they show the number of assets you own. This plays a large role in your creditworthiness. A person with more assets is usually more trustworthy than someone without a large number of assets. You could provide proof of any type of assets including checking or savings accounts, retirement funds, stocks, bonds, and mutual funds.
This isn’t a common type of credit reference, but if you own a business it could be valuable. Rather than asset statements, your lenders and investors write statements of creditworthiness based on the capital provided to the business.
This credit reference letter doesn’t talk about your credit history or how you pay your bills, but rather your habits. If you paid on time, managed your bills well, and used your credit wisely, creditors can portray it in your character reference letter. These lenders won’t help a financial institution make a lending decision but it may give that ‘something extra’ if a lender is on the bubble between approving or denying your credit request.
Reasons to Use a Credit Reference
Anytime you apply for new credit, you may need a credit reference. Most of the time, this means your credit report, but sometimes lenders need something besides your credit scores. They want to hear from other sources or see in other ways that you are a good credit risk.
Here are just a few reasons to use credit or character references.
Applying for a loan is risky business for lenders. They want to know that you have decent credit scores, but they may want further proof of your creditworthiness. They want to know if you made late payments (less than 30 days but still past the due date), overextended your credit limit, or had other credit issues.
Landlords want to see your credit scores and hear from others that you’re a good credit risk. Landlords may ask for a character reference letter or any other type of reference. Property owners put a lot at risk renting to you. Not only do they need you to make payments on time, but they also need you to be an honorable, caring person who won’t wreck the property, leaving the landlord with a loss.
When you move into a new home and need to set up services with a new utility company, you may need credit checks and reference letters. Utility providers want to know that you’ll keep up with your payments since they provide a service and then bill you. If you can’t supply references, they may require a security deposit before providing services.
How to Secure a Credit Reference Letter
If a lender, utility company, or landlord ask for a credit reference letter, do the following:
- Determine who you will ask for the letter. Think about companies you have a good relationship with and who will provide a positive reference. Think of at least three businesses you can ask and contact them.
- Confirm with your new lender the details they want in the credit reference letter. Do they want to know your payment history, balance, whether you pay your bills on time, or something else? Write all information down and ask your credit reference to include the information.
- Provide the credit reference with your permission to release the information. Make sure you provide the information in writing or your references can’t release the information.
Sample Credit Reference Letters
Each lender will ask for different details in a credit reference letter, but there are a few samples of letters you may provide:
Letter 1 – Basic Payment History
John has been a customer of XYZ Bank for X years. In that time, he has had 3 loans here each with positive payment history. John has had zero late payments in our time of doing business with him.
Letter 2 – Business Vendor Letter
John has been a client for X years. He buys supplies from us on a weekly/monthly/yearly basis and always pays his bills on time. John’s account has been late X number of times, and he always checks with us to make sure his account is in good standing.
Letter 3 – Line of Credit Reference
John has had a line of credit with us for X years. His total line of available credit is $x and the most credit he has ever had outstanding is $x. John always makes his payments on time. In the X years he’s had an account here, he has not made any payments late.
These are sample credit reference letters to give you an idea of what a financial institution or landlord may want. The key is to keep it short and simple. Offer just enough information, but not too much.
Credit Reference Tips to Boost Your Chances
Credit references only help if they are good and your references can only speak the truth. Here are a few ways to boost your chances of approval using a credit reference.
Monitor Your Credit Score
Check your credit reports often. If there are any errors, dispute them with the appropriate credit reporting agency. If you make a mistake and pay a bill late or overextend your credit, fix the situation quickly so it doesn’t hurt your credit score. Your credit report is usually the first credit reference lenders look at and you only get one chance to make a good first impression.
Use Character References to Offset a Negative Factor on Your Application
If you had something go wrong like you missed a payment or you had a gap in your employment, a character reference can fill the gap that the negative history creates. If another lender or company will vouch for you, it could win over the lender you’re asking to lend to you.
Provide Your References Quickly
Lenders like to close loan applications quickly. They don’t want your credit application sitting around unfinished for long. If they ask you for a credit reference beyond your credit score, act swiftly. Choose a reference that you know will provide the information in a timely and professional manner.
If you know there’s something negative on your credit report don’t hide it. Lenders are going to find out about the issue eventually, so you’re better of to tell them about it yourself rather than leaving it to your reference provider. If you say it, you have a chance to explain yourself. If the lender finds out any other way, it leaves room for interpretation and not in a good way.
What Is a Credit Reference FAQ
Who Can Give a Credit Reference?
Any company you have done business with before can give a credit reference. It could be a landlord, credit card company, utility service, or bank. Anyone who knows how you handle your money and/or provide you with credit can provide a reference.
What Do I Put for a Credit Reference?
You can put any past lenders or banks as your credit reference or use your credit report as a reference. Ask the lender you are applying with what they prefer. If you need to use a past financial institution, make sure you choose one you have a good history with for the best results.
What Are Examples of Credit References?
Credit references are anyone that has loaned you money before. It could be a credit card company, utility service, bank, or lending institution. You could also use a landlord who you have a rental history with if you don’t have any other references.
What Will Credit References Tell a Creditor About You?
Credit references tell a creditor about your payment history with them. They may also talk about your total credit line (how much you borrowed), how well you stayed within your credit line limit, and if you made your payments on time.
What Happens if You Don’t Have a Credit Reference?
If you don’t have a credit reference, the creditor may ask you for a character reference from an individual or company. A character reference doesn’t give quite the same information as a credit letter, but it can attest to your level of responsibility and ability to keep up with your commitments.
Is Credit Karma a Credit Reference?
Credit Karma provides access to your credit report, which you can use as a reference, but they won’t provide an official letter like most creditors want. Since most lenders pull your credit report themselves, they won’t consider Credit Karma a reference.
Are Credit References Effective?
When you apply for credit, creditors want proof of your creditworthiness. This usually means pulling your credit report, but many creditors need something more. They may want credit references to prove that you are financially responsible and aren’t a large risk. If you want credit approval from a lender and they ask for a credit reference letter, it’s in your best interest to choose the best creditor you have and ask for a reference.
Samantha uses her BS in Finance and MBA to help others control their finances through budgeting, saving, investing, side hustles, and travel hacking. Due to following the FIRE Movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles. She is now a full-time entrepreneur, freelancing coach, and blogger.