A “credit reference” is a document attesting to your creditworthiness that you could submit when you are applying for new credit. The most common type of credit reference is a credit report, as it chronicles your credit history, though you may also use individual credit accounts and personal character reference letters.
Below, we’ll explore credit references in greater detail, explaining when you would need to provide one, the most common types of credit references, and when they’re most effective.
When to Use a Credit Reference
You don't always need to use a credit reference in the situations below, but it can be helpful in some cases, like if you're a fringe candidate or you're dealing with a small bank.
- When you are applying to rent an apartment.
- When you are setting up a new utility service, like water or electric.
- When you are applying for a job.
- When you are applying for a credit card or loan.
You don't always need to use a credit reference in these situations, but it can be helpful in some cases, like if you're a fringe candidate or you're dealing with a small bank. You may also be asked to provide a reference by a service provider who is trying to evaluate how much of a risk you pose to them.
The type of reference you give can have 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.
Types of Credit References
Credit Report
Your major credit reports are the most important and most influential 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 quotes.
The most notable credit reports are those from TransUnion, Equifax and Experian. You can check your TransUnion credit report for free on WalletHub.
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. These records can have a significant influence on the person or business asking for a credit reference.
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. This statement can serve as an influential credit reference.
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. An applicant could also have someone provide a personal character reference for them over the phone or by email.
Since a personal character reference may not be someone who is knowledgeable about the applicant’s payment history and money management skills, this type of credit reference isn’t likely to help individual borrowers very much. However, the times it can help include when you are:
- Working with small neighborhood banks and credit unions. These small banks and credit unions are more likely than national lenders to value personal relationships.
- Borrowing for business. 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.”
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 bad 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.
Save Your Best References for High-Stakes Situations
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. You may be able to use a credit reference to explain a collection account or a foreclosure, for instance.
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. Documentation of extenuating circumstances could help improve your chances of getting a lender or creditor to reconsider your credit application.
Choose Trade References Wisely
A business generally needs at least three trade references, preferably from its biggest suppliers. It also helps if your business references can show that you have a history of making on-time payments.
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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WalletHub experts are widely quoted. Contact our media team to schedule an interview.