What are Credit References? Definitions and Examples

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Most people are quick to form an opinion about credit references even without knowing what they really are.

Credit references are records that indicate or summarize a borrower’s credit history and are usually used to support rental applications.

You will be amazed to know that tons of individuals and businesses request credit references from their banks and other sources for proof of credit responsibility and eligibility.

The importance of credit references can’t be downplayed.

Therefore, it is important for you to understand what it really means and how it works.

Hence, if you are one of those keen on understanding what credit references mean, as well as the examples, this article is for you. Dive in!

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What are Credit References?

A credit reference is also referred to as a letter of good standing.

Credit references are records that reveal or outline a borrower’s credit history and are frequently used to support rental applications.

This document, to a large extent, indicates whether or not the applicant can make payments on time.

In other words, a credit reference is regularly used to assess a person’s or individual’s creditworthiness.

Also, it shows the payment eligibility of a lender. In addition, credit references help warn lenders about the credit history of an applicant.

By implication, if the credit history indicates that the lender doesn’t make outstanding payments at the due time or in the right amount, the lender may end up declining the application.

Examples of Credit References

There are three distinct examples of credit references out there. Below are examples of credit references:

  • Loan application
  • Rental agreement
  • Utility services

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Types of Credit References

The following are the types of credit references:

Credit reports

A credit report is the most common type of credit reference. Credit reports assess the debt and debt management of applicants.

Credit reports greatly influence the ability of an applicant to borrow.

Personal character reference

Personal character references might occasionally be helpful to the lender. However, they are not as helpful as financial references.

You can sum it up this way, if your loan application indicates a possible rejection, having connections is preferable to no reference. In other words, it is a character endorsement from family or friends.

Financier Support documentation

This document differs from the personal character reference. In this category, those providing financial help submit the financial support document. A shareholder or investor can provide this.

Companies or businesses usually use them and are regarded as adequate credit references.

Assets documentation

The applicant’s assets, particularly cash, are usually a key indicator of their financial stability.

Lenders will be willing to lend more when the applicant has more assets. In addition, lenders are less hesitant since assets are seen as collateral.

Furthermore, applicants can request a record of their investment accounts from their brokers in addition to giving a detailed description of the assets owned.

An individual’s net worth may be accurately determined by their investments.

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How Do Credit References Work?

Credit references come into the picture when an individual applies for a loan or utility service from lenders.

This action, most times, will require him to contact a previous lender or services provider for a record or documentation that clearly covers his credit history with them.

Remember, the information in the credit references help lenders in deciding whether to approve the application or not.

When Do You Need Credit References?

You need a credit reference when requesting to borrow money from a lender or to use a service.

There are several situations when you can request a credit reference.

The following are a few of the most frequent scenarios:

Loan applications

Most lenders usually request a credit reference when you submit a loan application.

These recommendations inform a lender as to whether or not you, the applicant, will repay the money you borrow.

Utility services

Utility services, like electricity, gas, cable, or phone service, often require credit references..

Before activating accounts, companies that offer these services could request a credit reference to check your payment history for other services of a similar nature.

What are the Components of Credit References?

For those wondering about the components or elements of a credit reference, not to worry, we’ve got you covered.

The following are the components of credit references:

  • Name of the borrower or applicant
  • Accounts numbers
  • How long has the applicant been a customer
  • If the borrower failed to make any payments in the previous year
  • What goods are traded? (products or services)

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How Can You Secure a Credit Reference Letter?

When applying for a service, loan, or rental property, your lender will likely request a credit reference.

Therefore, it is vital for you to know how to go about securing the references in order to meet the conditions of the service provider or lender.

You can secure a credit reference that can meet the requirements of the lender through the following steps:

Confirm the specifications

Check the lender’s, landlord’s, or service provider’s reference criteria. If the letter does not meet the needs of the entity, it will have little influence and may not increase your chances of obtaining a favorable answer.

Some organizations that demand reference letters give forms that former lenders, service providers, employers, and other credible resources may fill up with the essential information.

Send out a request

In the event that he or she agrees to give a reference, ensure to provide guidelines or a template to guarantee that you meet the standards of your credit reference letter.

Grant authorization

You might need to give consent in order to release information regarding account history. Inquire if you must provide permission, how to do it, and how you can grant authorization.

You could also need to fill out certain documents, or you might be able to provide authorization online, for instance.

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What are Credit References on a Rental Application?

If you are one of those wondering what credit references on a rental application are, no need to worry, we’ve got you covered.

Credit references on a rental application are not entirely different from the regular credit references you request on a loan or utility.

However, in this case, the landlord simply wants to ensure that you are not a risk and that you will pay your rent on time.

In other words, he may request a credit reference from your bank to cover information on key areas, such as loan amount, payment history, and length of the financial relationship.

However, your rental application may suffer if you have no credit history, few references, or poor credit history.

Renting to someone without proof that she can make regular rent payments could make the landlord uncomfortable.

FAQs

What are the best credit references?

The most popular type of credit reference is a credit report. They are also the most important references since they give a thorough account of the applicant’s credit history.

Where do I get credit references?

Your bank or a previous lender makes the greatest credit references. Asking the bank manager for a credit reference is pretty simple because banks often get requests for credit references.

In addition, they generally have a quick-print standard template reference available to them.

What are credit types?

The three primary types of credit are installment credit, open credit, and revolving credit.

However,  each type of credit is based on the distinct ways in which debt is acquired and paid back.

What are sources of credit?

The following are some of the major sources of credit:

  • Friends and family
  • Loan companies
  • Cheque cashing center
  • Financial institutions
  • Retail stores

What is the 5 C's of credit?

All lenders will take into account the following four essential elements when determining whether to give a loan, despite the fact that requirements may differ from lender to lender: capital, capacity, credit, and collateral.

What is the importance of 5cs of credit?

Using the five C’s of credit as a framework, lenders can assess a loan applicant’s creditworthiness or if they are deserving of receiving fresh credit.

In addition, they can easily understand the risk a borrower poses by taking into account the borrower’s character, ability to make payments, economic circumstances, and available money and collateral.

Conclusion

When it comes to credit references, both parties involved mostly resort to contacting previous lenders for verification of the application process.

Therefore, this record or document prevents the lender from approving a borrower’s application with a poor credit history.

We hope this article met your expectations. For feedback, reach us through the comment section.

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