What Is a Credit Reference? What You Need to Know

Whenever a person undergoes a credit inquiry or check, they need to share information regarding their creditworthiness–that is, their ability to manage and pay back debt. But how does one prove their creditworthiness? That’s where credit references come in. 

In this guide, we’ve covered all you need to know about credit references, including what they are, when you might need one, and why a good credit reference is so important. 

What Is a Credit Reference? 

A credit reference details a person’s credit history; it is also known as a ‘letter of good standing.’ Lenders, such as banks, request credit references to weigh the risks associated with loan approval, and to determine the interest rates they will offer you. 

A credit reference typically lists the following: 

  • Relationship duration 
  • Payment history 
  • Payment amounts 
  • Account numbers 
  • Debt accrued 

Lenders may also ask for additional information to help determine an applicant’s trustworthiness. 

It’s also important to note that credit references don’t always contain positive information. If you haven’t kept up with your payments or are currently behind, this will be made known to your lender, which can affect the outcome of the loan or service you’re applying for. 

The best course of action in this situation is to hire a professional credit repair service–the costs for credit repair are well worth the benefits of getting your credit on track. 

When to Use a Credit Reference 

A credit reference is typically requested when switching a utility provider or taking out a loan. You may need a credit reference in the following circumstances: 

  • You’re looking to rent a new place and your landlord requires your past credit history. 
  • You’re looking to borrow and the lender requires a letter of good standing to determine your ability to repay the loan. 
  • You’re switching utility providers and they need a credit reference to activate your new account and ensure your trustworthiness. 

Types of Credit Reference 

A credit reference is an umbrella term covering different types of letters of good standing. Here are some of the main types of credit references:

  1. Credit Report 

The most commonly used credit reference is a credit report. A credit report is a vital aspect of an individual’s credit score. It lists a loan applicant’s debt history and debt management, including their credit accounts, payment history, debt durations, etc. 

  1. Personal Character Reference 

A personal character reference is a declaration of an individual’s character and trustworthiness given by their close friends or family. While it isn’t as practical as a financial reference, it is often used as a last resort and can help the lender in tough circumstances. 

For instance, if a loan applicant is on the verge of rejection, a personal character reference offers the applicant better chances of securing a loan than they would have with no reference at all. 

  1. Documentation of Assets 

A detailed documentation of assets is a good indication of an individual’s net worth. You can get this documentation by asking your broker for a record of investment accounts. 

The higher the value of the assets a person has, the more likely they are to secure better loans. In addition, assets can also be considered collateral, making lenders more willing to offer you a better deal. 

  1. Financier Support Documents

Unlike personal character references, financier support documents are official references from individuals who provide financial support. They are typically used by businesses applying for loans and can be obtained from their shareholders or insurers. 

Why a Good Credit Reference Is Important  

A good credit reference can make your life easier. Someone with a good credit reference is more likely to qualify for loans or credit cards and be offered good terms and low interest rates. 

In some cases, you may even save money on insurance, as most states rely on credit-based scores to determine rates, giving you a significant advantage. What’s more, you may be able to avoid paying security deposits to get utilities and have more choices regarding where to rent or what jobs you qualify for. 

For more helpful financial information, check out our posts on whether paying rent builds credit and if 650 is a good credit score!