If you are a brand new client with a lender, supplier, or utility provider, it is difficult to predict whether you will pay your accrued bills within the specified time. It is risky for you to be granted anything on credit without providing cash up front. However, a credit reference, such as a credit report or credit reference letter, may help you receive favorable terms on a service or a loan you need. So what is a credit reference? This article highlights what is a credit reference, the types of credit references, tips for references, and credit reference letters.
What Is a Credit Reference?
To understand what is a credit reference, you need to know the various types of credit references. A credit reference is a document that ascertains the creditworthiness of a prospective rental applicant or borrower. Lenders use both credit reference letters and credit reports in their lending decisions for both businesses and individuals. However, the most common type of credit reference is the credit report, since it shows a business’s or a person’s credit history. The most notable credit reports are from Equifax, TransUnion, and Experian. Credit reference is also referred to as a trade reference in this case.
Types of Credit References
Now that you know the answer to the question 'what is a credit reference', you should be acquainted with the types of credit references. Credit references come in several variations and are used in many circumstances. They also boast varying levels of effectiveness.
The following are the types of available credit references.
Your money among other assets speaks a lot to lenders. Therefore, proof of their existence serves as an important credit reference. Lenders do not take your word for anything. You will have to ask your financial institution to send records of your assets on your behalf. The effectiveness of asset documentation is high.
Your credit reports are the most important credit references you can provide. They serve as a basis for all credit scores and are used in lending decisions. They also play a role in employment decisions, insurance quoting, and tenant screening. They are highly effective credit references.
A financier report is similar to a statement of assets and a business can use this statement from investors among other financial supporters to show the availability of capital. This credit reference is also highly effective in proving your creditworthiness.
If you are an applicant, you may attempt to appeal to the emotions of underwriters with letters from employers, family members, and friends. The letters may be an essential attest to the responsibility and character of the applicant or lend context to elements of an individual’s financial history. However, the effectiveness of this credit reference is low.
Tips for References
Now that you know about types of credit references, you need to be acquainted with the tips. So what is a credit reference tip that will have an impact on you receiving a loan? Simply submitting a credit reference will not necessarily do much for you. The credit reference needs to make a positive impact. There are a lot of factors that may contribute to a positive credit reference impact.
The following are some pointers to use.
Use References to Explain Shortcomings
Credit references can help provide context to any red flags that may be in your financial past. This tip applies the same principle as using a personal statement when applying for a college program to explain a suspension, or a letter from the doctor that explains a period of unemployment. However, the infraction in question could be a foreclosure, tax lien, or collection account.
Do Not Waste Your Bullets
You should not just use any references. Organizations and individuals may be tempted to use many references, but that is not necessary. You should save the best credit references for the highest-dollar situations, such as an important business loan or a mortgage. You should also use other means to improve your chances of getting approved for a credit card.
Send Credit References with a Reconsideration Request
Only a few individuals may know this, but there is a procedural process that involves asking a lender to re-evaluate your application. You should note that documents of justification could help in improving the likelihood of winning on appeal.
Monitor Your Credit Report and Score
You should note that your credit report is the most powerful reference available. Therefore, it needs to receive a lot of attention. It is also important that you make sure it is fraud and error free. If there are instances of fraud, this will greatly affect your credit reference. We recommend that you settle for nothing less than an excellent standing, as this is what will get you the best terms and open the most doors. Individuals that have an excellent credit score save a lot of money on their annual mortgage. This is because lenders will offer you loans that have diminished interest rates. This also applies to credit card and car insurance payments, and auto loans. Therefore, if you have a good credit score, you are more likely to save compared to people with fair or limited credit.
Credit Reference Letters
Now that you know what is a credit reference, it is vital that you get acquainted with the credit reference letters. A credit reference letter is basically a letter that provides a description of your payment history with a company or business you have worked with in the past. It is also referred to as a letter of good credit or “good standing.”
The letters typically provide the lender with additional details about your account and the type of service you use and the length of the relationship. If you are behind on payments or instances where you have paid late, the letter includes that information. The letter comes from your previous service provider and goes to your new service provider.
A credit reference letter plays a big role in corporate lending, including business-to-business credit arrangements, where the history of the borrower is not readily available. It also plays a role where the voucher of a trusted source (for example, a vendor with whom the business has previously worked) is more meaningful. Credit reference is also referred to as a trade reference in this case. The letter can help you secure services based on your dealings with suppliers you’ve done business with in the past. Therefore, its purpose is to vouch for you. The recipient becomes more comfortable in extending the credit line to you.
Are Credit Reference Letters Same as Credit Reports?
Your credit report is similar to a credit reference letter, but there are some differences. Credit reports usually contain information from a variety of sources, and this data is often centralized at credit bureaus and are subject to strict consumer-protection laws. On the other hand, a credit reference letter is more informal and typically goes from one business to another. Everyone has credit reporting data somewhere, but you receive a letter only if you ask for one. The letters are helpful for establishing a business credit.
Why You Need a Credit Reference Letter
You need a credit reference letter for utility services, business loans, and suppliers, and when you have insufficient credit. In utility services, you need the letter when you sign up for phone, electricity, water, or gas service, which you provide before activations. In business loans and suppliers, it vouches that you will repay in time. If you have insufficient credit, you might need a letter to improve your appeal.
How To Get a Reference Letter and What to Include
You should verify the requirements first and then request the letter. You should also provide an authorization to the letter writer, which is done by fax or online. In the letter, you should include the length of the relationship and payment history, which are the most important elements. However, you may include other details including the type of service, terms of credit, the address of service, account numbers, typical and total payment amounts, and late payments.
If you had a question on what is a credit reference, the article has provided answers and highlighted two credit references–credit report and credit reference letter. A credit reference is a document that ascertains the creditworthiness of a prospective rental applicant or borrower. There are a variety of references, including asset documentation, credit report, financier report, and personal character.
Lenders use both credit reference letters and credit reports in their lending decisions for both businesses and individuals. A credit report can also be used to refer to the individual accounts on your credit report. For instance, an individual with no prior credit history is thought to have insufficient credit references. This implies that there few data points for lenders to assess the creditworthiness of the person.
If there are insufficient data points for creditworthiness determination, a letter from a credible source that explains the person’s financial trustworthiness can be used. This credit reference might not help individual borrowers much, except for situations that involve small credit unions and neighborhood banks, which are more likely to value personal relationships compared to national lenders. A letter plays a big role in corporate lending where the history of the borrower is not readily available. We hope that this article had adequately addressed what is a credit reference, the types, and tips to use for the reference.