What Is a Credit Reference? – Meaning and Examples
In case you are on the market for a loan you may have heard of this term but still wonder what a credit reference is.
Well, to put it simply the meaning of credit reference is for lenders to use it as a source that can provide information about the borrowers’ credit history. This can be either positive or negative. Positive credit references show that the individual has a good history of borrowing and repaying loans on time. Negative, on the contrary, shows that the borrower has a history of late payments or defaulting on loans.
A credit reference is important for a business as well as for the individual.
Lenders, such as banks, request a credit reference from applicants to weigh the risks associated with the loan approval. A credit reference is also known as a letter of good standing. Landlords also use credit references to assess rent applications and decide whether or not to lease the apartment to the individual. This practice is also used by employers to check an applicant’s financial history.
The credit reference information may include creditworthiness, credit limit, payment history, and other relevant financial information.
How Do Credit References Work?
Credit references are used to help lenders decide whether or not to give you a loan. They provide information about your credit history and can help lenders assess your creditworthiness. When you apply for a loan, the requested service has certain risks associated with it. Therefore, lenders ask for documentation to verify if the applicant is trustworthy.
When you apply for a loan, the lender will likely first check your credit score and report. But they may also ask for your permission to contact your references. They are also known as a testimonial or a recommendation.
Your credit references are people who can attest to your creditworthiness. They may be personal references, such as friends or family members, or professional references, such as landlords or employers.
The lender will contact your references to ask questions about your credit history and repayment habits. They may also request financial documents, such as bank statements or pay stubs.
Based on the information they gather, the lender will decide whether or not to approve your loan. If you have a good credit history and reliable income, you’re more likely to be approved for a loan with favorable terms.
Example of Credit Reference
We already talked about what credit references are and why are they so important in everyday life. But, let’s once again take a look at credit reference examples and how they influence the overall decision so you can further understand the concept.
- Utility provider. Let’s say you’ve been with the same electricity provider for a few years but recently decided to move. So, naturally, now you need to find a new energy service and they will likely request a credit reference. The one they will likely get from your old provider will include information about you as a user such as did you miss any payments, do you have a history of late payments, etc.
- Apartments. The other common example when the credit reference is needed is with the apartment hunting process. Let’s say you’ve been living in the same home for a couple of years now, and now that you got a new job you must move to a new city. Your new landlord will likely ask for a credit reference letter. The previous one will then give their opinion on you as a tenant. They can either give positive or negative feedback and this will impact the decision on whether or not you will get an apartment.
The credit reference will also include information about your credit history, any late payments, bankruptcies, or other negative information if needed. It will also show your credit score.
If you’re trying to get a loan, you should ask your lender for a copy of your credit reference so that you can see what information they’ll be looking at. You can also get a free credit report from each of the three major credit bureaus once per year.
Use all of these resources to your advantage so you can score the best deal possible.
Types of Credit References
There are many different types of credit references that can be used to help establish creditworthiness. Some common examples include employment records, rental history, utility payments, and financial statements.
The most common and widely used credit testimonial is the credit report. A credit report accurately reviews a loan applicant’s debt and debt management. It will show the applicant’s credit accounts and payment history.
Employment records can also be used as a credit reference if you have a steady job and income. Rental history can be used especially if you have a good payment history with your landlord.
Credit references are important because they help show lenders that you are a responsible borrower. They use credit references to determine whether or not you are a good candidate for a loan. If you have a strong credit reference, it will be easier to get approved.
Who Can You Put as a Credit Reference?
When you’re applying for credit, most lenders will ask for at least one credit reference. A credit reference is someone who can attest to your creditworthiness – in other words, whether or not you’re likely to repay a loan.
And to answer your question- who to put as a credit reference, the answer will depend on the service or loan you want to get. There are a few different types of people who can serve as a credit reference, including:
- A friend or family member. If you have a close friend or family member with good credit, they may be willing to act as a reference for you. Be sure to ask them first, and make sure they understand the responsibility involved.
- A financial institution. Your bank or another financial institution where you have an account may be willing to provide a reference for you. This is usually only the case if you have a long history with the institution and maintain a good relationship with them.
- Your employer. In some cases, your employer may be willing to act as a reference for you. This is more likely to be the case if you’ve been employed by the same company for a long time and have a good track record. Again, make sure to ask first.
- A landlord or utility company. If you’ve been a responsible tenant or customer of a utility company, they may be willing to provide a reference for you. This can help show that you’re reliable in making payments on time.
- A professional reference. If you have a professional reference, such as a lawyer, accountant, or doctor, they may be willing to vouch for your creditworthiness. This is usually only the case if you have a long-standing relationship with the individual and they know you well.
Keep in mind that not all references are created equal. A friend or family member may be more likely to give you a positive reference, even if you don’t have the best credit history. On the other hand, a financial institution or utility company will only provide a reference if they have evidence that you’re likely to repay a loan.
When choosing a credit reference, it’s important to choose someone who you think will give you the best chance of getting approved for a loan.
When to Use a Credit Reference
A credit reference is a document, person, or company that can provide information about whether you typically have paid your bills on time.
Different credit reference forms are commonly used when applying for a loan or credit card, or during a credit check. When you apply for either one of those, your lender will likely contact your credit references to verify your identity and obtain information about your credit history.
Additionally, this information will also be used when you are in the process of getting a new apartment or signing up for a new service. In general, more and more lenders look into credit references when deciding how risky you are as a borrower.
How to Use Credit Reference to Your Advantage
Credit references are a great way to improve your creditworthiness and help you secure better terms on future loans. Here are a few tips on how to use credit references to your advantage:
- Get familiar with your credit report. Request a free copy of your credit report from the three major credit bureaus (Experian, TransUnion, and Equifax) so that you can know what lenders will see when they check your credit. Review the report carefully for any errors or negative information that could be dragging down your score.
- Use positive credit references to offset negative information. If you have some positive accounts in good standing on your credit report, make sure to list them as references when you apply for new loans or lines of credit. This will give lenders a more complete picture of your financial history and help offset any negative information.
- Stay current on all of your payments. One of the best ways to improve your creditworthiness is to demonstrate a history of timely payments.
Final Thoughts
Assuming you’ve followed the steps above, you should now have a good understanding of what a credit reference is and how to use it to your advantage. As you probably guessed by now, this information is getting widely used in today’s world so being familiar couldn’t hurt.
Don’t be afraid to ask for a credit reference when you’re applying for credit. A good credit reference can go a long way in helping you get approved for the loan you need.
If you have any additional questions about credit referencing, please get in touch with an experienced financial advisor to get a better understanding of the topic.
