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?
Ask the Experts
Louise and Henry Epstein Professor of Business Administration and Professor of Finance and Economics at University of Rochester
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Executive in Residence in Finance and Real Estate, in the Kogod School of Business at the American University
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Professor of Economics at the College of Lake County
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Dean and Professor of Finance in the C. T. Bauer College of Business at the University of Houston
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Adjunct Professor of Economics and Finance at the University of San Diego
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Professor of Finance in the College of Business and Public Administration at California State University San Bernardino
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