Credit Reference

Credit Reference Meaning

A Credit Reference is a document verifying an individual or business’s creditworthiness. It is similar to a job reference. The document attests to an entity’s credit history.

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.

Key Takeaways
  • A credit reference is a document or information that can verify an individual or a business’s ability to repay debt.
  • In many cases, lenders will request this document for loan approval. Additionally, this information is required for switching service providers as well.
  • There are several different kinds of references, such as credit reports, documentation of assets, personal character references, and financier support documentation.

How Does Credit Reference Work?

The credit reference process typically begins when applying for a loan or utility service. The requested service has risks associated with them. Therefore, lenders ask for documentation to verify if the applicant is trustworthy. They are also known as a testimonial or a recommendation.

Lenders often use the requested information to decide if they should approve the application. Lenders list out the documents required by them. In most cases, the following set of information is provided to the lender:

Elements of Credit Reference

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  • Borrower’s name
  • Account numbers
  • How long the borrower has been a customer.
  • If the borrower missed any payments in the past year
  • What goods are exchanged (products or services)

Lenders could ask for further information that may help determine the trustworthiness of an applicant. Lenders may further request information concerning the payment amount and the total amount paid to the institution.

Credit references are not positive information all the time. Instead, references let the company know if the applicant does not keep up with payments or if currently behind.

Steps to Getting a Credit Reference

Although the process can look different for different instances, obtaining a testimonial for an applicant’s credit history will typically involve the following steps.

#1 – Determine What Information is Needed

The lender will typically provide a template outlining the information they require. However, if they don’t, it would be wise to verify this and avoid going back and forth with them.

The information can include any of the above listed, such as your payment history and current standing with the provider.

#2 – Request the Credit Reference from Provider

Applicants have to contact previous service providers to request a letter of good standing.

Different service providers or creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. read more have different terms for qualifying a loan or service. For example, they may require applicants to have been with the previous service provider for over a certain amount of time. Else, the lender might require the applicant to meet a certain threshold of monthly payments.

#3 – Allow the Provider to Transfer Applicant Information

Since the previous service provider releases personal information, they request a written authorization allowing them to proceed.

This information is sensitive, and the previous service provider doesn’t want it to be released unless certain about authorization. In some instances, lenders contact the references provided by the applicant to ensure the accuracy of information.

Credit Reference Examples

To better understand credit recommendations, consider the following examples from everyday life.

Utility Provider

Susan has been with the same electricity provider for a few years but recently decided to move. Susan’s new energy services are requesting a credit reference. The reference looks like this:

“We have been providing services to Susan since 2011. For the duration of the time she has been with us, she has not missed a single payment. Our records indicate all payments have been made in full.”

Apartment

Timothy has been living in the same apartment for four years now and has finally accepted a new job that requires him to move to a new city. His new landlord is requesting a credit reference. The previous landlord gave the following recommendation:

“The tenant Timothy has been living in our apartments for four years. During this time, Timothy has paid the rent in full every month and has not missed a single payment to date.”

When to Use a Credit Reference?

A credit reference is typically requested for taking out a loan or switching to a new service provider. A credit recommendation may be required in the following instances.

#1 – Utility Services

When switching utility providers (gas, electricity, cable, water, or phone), a credit testimonial is required to activate the customer’s account. Providers request a letter of good standing to ensure the trustworthiness of the customer.

#2 – Rental Agreements

Rental agreements are another common scenario where references are required. Landlords like to ask around to determine the tenant’s history. The primary focus is the tenant’s past credit history.

#3 – Loan Applications

When an individual is looking to borrow, most lenders request a letter of good standing to determine the applicant’s ability to repay.

Types of Credit Reference

A credit reference is an umbrella term that covers a few different versions of a “letter of good standing.” Here are the different types of creditTypes Of CreditTrade credit, bank credit, revolving credit, open credit, installment credit, mutual credit, and service credit are some of the different types of credit.read more recommendations.

#1 – Credit Report

The most common and widely used type of credit testimonial is the credit report. A credit report is an accurate review of a loan applicant’s debt and debt management. It will show the applicant’s credit accounts and payment history.

Credit Report

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Credit reports are a vital aspect of an individual’s credit score, significantly influencing an applicant’s ability to borrow money. The most popular being the Fico Credit Score, used by 90 percent of lenders in the US.

#2 – Documentation of Assets

Applicant’s assets, including cash, will be a significant sign of financial health. The more assets applicants have, the more lenders will be willing to lend. Assets are considered collateral making lenders are less reluctant.

Applicants can ask their brokers for a record of investment accounts. This can provide a detailed summary of the assets owned. Investments are a good indication of an individual’s net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more.

#3 – Personal Character Reference

Although a personal character reference isn’t very practical as a financial reference, in some instances it may help the lender. When a loan applicant is on the verge of being rejected some kind of reference is better than no reference. It is basically a declaration of an individual’s character given by family or friends.

#4 – Financier Support Documents

Unlike a personal character review, financier support documents come from individuals who provide financial support. This could come from an investor or shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more.

These will typically be used by businesses applying for loans and considered a sufficient credit recommendation.

Frequently Asked Questions (FAQs)

Who do I put for a credit reference?

Anyone who has provided the applicant credit or had a financial relationship can serve as a credit reference. Applicant’s credit card company, local bank, investment firm, past landlord, or a local business that offered a payment plan are examples.

What is an example of a credit reference?

Susan has been with the same electricity provider for a few years but recently decided to move. Susan’s new energy services are requesting a testimonial. The testimonial about credit history looks like this:

“We have been providing services to Susan since 2011. For the duration of the time she has been with us, she has not missed a single payment. Our records indicate all payments have been made in full.”

Who can give a credit reference?

Another creditor, a professional or personal acquaintance of the applicant, or a financial organization such as a bank or credit union are all common sources of credit references. Unlike a co-signor, the referring person is not bound by the approval of credit.

This has been a guide to What is Credit Reference and its Meaning. Here we discuss steps to getting a testimonial, its types, when to use it, and how it works using examples. You may also have a look at the following articles to learn more –