In some circumstances, you may need to provide a credit reference to potential lenders, landlords, or utility companies. But what is a credit reference, and what is it for?
We look at what this document actually is and in what situations you may be required to provide it.
What Is A Credit Reference?
A credit reference is a document that demonstrates your creditworthiness. It will typically include your credit history and is used in a variety of situations. The most common use of a credit reference is when you are applying for a loan.
Potential tenants often use it to support a rental application and for utility companies to prove their credit standing and past credit history.
What’s On A Credit Reference?
Included in a credit reference will be the following:
- Your relationship with the letter issuer
- Length of the relationship
- Payment details, e.g., if you made payments on time
- Account numbers, if applicable
- The amount you typically pay
- The total amount of outstanding debt
This may vary, and the contents of the credit reference will depend on the requirements of the person or institution that requested it.
How Does A Credit Reference Work?
By supplying a lender or potential landlord with a credit reference, you are giving them access to your credit history, so they can determine whether you are a risk.
If a credit reference shows that you have made timely payments on your debts, you will be more likely to be approved for a loan or rental. However, you would be considered a risk if your credit reference shows late payments or defaults on debts.
How Can You Support A Credit Reference?
To help your case, what else can you do to support a credit reference and increase the chances of a positive outcome?
Keep an eye on your credit score and review your credit reports frequently. Make sure the information on them is accurate and up to date. If you spot any errors, bring them to the attention of the respective credit bureau.
Try to improve your credit score by making regular, timely payments and keeping your credit utilization rate low. You can also use character references to boost your application if you have a limited credit history.
When Do You Need A Credit Reference?
So what are the circumstances in which you may need a credit reference?
Credit References For Borrowers
The most common requests for credit reference come from lenders. When you apply for a loan, lenders typically request a credit report containing information on your past credit history. This will show them if you are a potential lending risk.
Credit References For Potential Tenants
A potential landlord may request a credit report to ascertain your creditworthiness and the likelihood of paying your rent on time. By looking at your credit history, they can see if you have ever defaulted on rent or had bad credit in the past.
Credit References For Utilities
Prior to activating a utility account, companies may request a credit reference. These can include electricity, gas, phone, and cable services. Your credit report will tell them if you have ever failed to pay for similar services.
Credit References For Employment
In some states, employers can gain access to a modified version of your credit report. They cannot do this without your permission, however. But this willingness to share your credit history with a potential employer may stand you in good stead.
Types Of Credit Reference
There are a number of documents that can be considered credit references. Credit reports, asset documentation, financial support documentation, and character references.
Credit Report
The most common type of credit reference is a credit report. This is a history of your credit history which provides information on your creditworthiness and financial standing.
All credit bureaus provide credit reports for individuals, so this is one of the easiest credit references to provide when you are applying for a loan or rental space.
Asset Documentation
Asset documentation serves as a highly effective credit reference. This is supplied by the financial institution that manages your assets, such as savings accounts, stocks, bonds, or retirement funds.
You will need to request this from your financial institution.
Financier Support Documentation
Another highly effective credit reference is financier support documentation. Instead of relating to an individual, this reference is provided to businesses that may be looking to borrow money or rent a business space.
The document provides information on the business’ access to available capital.
Character Reference
A character reference is useful to those who have a limited credit history, such as graduates. While it doesn’t have the weight of the previously mentioned credit references or provide past financial information, it can be useful to demonstrate creditworthiness and responsibility.
You can obtain a character reference from previous employers, past landlords, and even utility companies. They can add context to an application that may otherwise be missing.
How To Check Your Credit References
If you need to provide a credit reference for a loan or apply for rental space, it is worth knowing what will be on your credit reference. So how do you check your credit references?
Under the Fair Credit Reporting Act, consumer reporting companies are required to provide you with a free copy of your credit report once every twelve months. Although you will have to request it, it doesn’t happen automatically.
This will let you see what potential lenders or landlords will see, and if there are errors, it gives you the chance to rectify them.
Final Thoughts
A credit reference is potentially one of the most important documents that you will need in your financial life. It can determine your access to credit or the possibility of renting an apartment or business space.
Keeping an eye on your credit score and getting your free annual credit reference will help you be prepared should you ever need a credit reference.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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