Credit Reference

A credit reference is a document verifying an individual or business's creditworthiness. It is similar to a job reference. The document tries to attest 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.

• 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.

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:

• 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 an applicant's trustworthiness. 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.

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 creditors have additional 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 written authorization 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.

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

#1 - Utility Provider

Susan has been with the same electricity provider for a few years but recently moved. 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 her time with us, she has not missed a single payment. Furthermore, our records indicate all payments have been made in full."

#2 - 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."

A credit reference is typically requested to take out a loan or switch 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 customer's trustworthiness.

#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.

A credit reference is an umbrella term covering a few different versions of a "letter of good standing." Here are the different types of credit recommendations.

#1 - Credit Report

The most common and widely used credit testimonial is the credit report. A credit report accurately reviews a loan applicant's debt and debt management. It will show the applicant's credit accounts and payment history.

Credit reports are a vital aspect of an individual's credit score, significantly influencing an applicant's ability to borrow money. The most popular is 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 lend. In addition, assets are considered collateral, making lenders less reluctant.

Applicants can ask their brokers for a record of investment accounts as they provide a detailed summary of the assets owned. Investments are a good indication of an individual's net worth.

#3 - Personal Character Reference

Although a personal character reference isn't as practical as a financial reference, it may help the lender in some instances. For example, when a loan applicant is on the verge of rejection, some connection is better than no reference. It is 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. For example, this could come from an investor or shareholder.

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

This has been a guide to 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 –

• Fair Credit Reporting Act (FCRA)
• Carbon Credit
• Standby Letter of Credit