A good credit reference can help you get the money you need at a rate you can afford
People with good credit seem to have everything laid out for them, from easy access to money to low rates on loans. The other 90% of us with less than excellent credit don’t get the same privilege.
In fact, if you have bad credit or no credit history at all, good luck getting anything from a bank or most lenders. You might even have trouble renting an apartment.
There is one tool that can help you get the money you need and a little financial respect, the credit reference.
A good credit reference can mean the difference between getting your loan or being rejected, the difference between having to put down just a month’s security deposit or six month’s deposit.
What is a Credit Reference?
A credit reference is a letter that verifies your past credit history to a new lender or landlord. The reference comes from someone that has extended you credit or that has had some kind of financial relationship with you.
A credit reference usually includes any information about your credit or financial history with the person that might not be on your official credit report.
The three credit bureaus; TransUnion, Experian and Equifax provide credit references through the credit reports they keep. These reports are a record of your loans and payment history.
Applications for most loans will pull your credit report from one of these agencies. If you don’t have more than a few years credit history or if you have bad credit from some missed payments, you might also be asked to provide a credit reference.
The emergence of peer-to-peer lending on the internet has made it easier to get a loan, even for people with bad credit, and credit references aren’t used quite as much. For example, I had to get a credit reference to get a signature loan in 2010 but didn’t need a reference for a personal loan I got later that year.
Why is a Credit Reference Important?
If there isn’t much information on your credit report or you have a credit score that wouldn’t normally be high enough to get a loan, a credit reference can help support your application.
Remember, lenders are in the business of giving loans. They want an excuse to lend you money so they can collect interest. Offering a credit reference could be just enough to get them to overlook a few missed payments on your credit report.
Credit references can be critical for younger borrowers with limited credit history or bad credit borrowers that need extra proof of their credit worthiness.
Your credit report is almost always used when you apply for a loan but some lenders will also ask for other references from your bank or a brokerage account. A credit reference is most often ask for on unsecured loans like signature loans from your bank.
This is why it’s important to be on good terms with your bank and any local lenders. Having at least one account with a local bank can help make sure you can get a reference when you need it.
Some examples of credit references:
- Your bank might be asked to verify how long you’ve had an account, the average balance and if there have been any overdrafts in the last year.
- Your brokerage or investment account might be asked to verify your assets and how much money you’ve borrowed on margin.
- Previous landlords may be asked for a reference on any rental applications.
How Do I Get a Credit Reference?
The key to a good credit reference that will help you get a loan is to get one from a credible and impartial source. A letter of reference from your parents or friends isn’t going to influence a lender or landlord. The best credit references come from your bank or a previous lender.
Banks are asked to provide credit references all the time so it’s fairly easy to get one, just ask the bank manager. They will usually have a standard template reference they can print out quickly.
If you’ve had any loans from local businesses, from car dealers or store credit, these can also make for good sources of references.
An employer can be a source for a character reference but usually doesn’t know enough about your credit to vouch for your finances.
Credit Reference on Rental Application
You might also be asked for a credit reference when filling out a rental application. Since most landlords are individuals or small companies, they might not want to go through the expense of checking your credit report. This means offering a credit reference and a character reference could get your application approved even if you have bad credit.
The best reference will be from a previous landlord. If this isn’t possible, get a reference from your employer and your bank.
Credit Reference Example
There is usually a standard template for credit references, especially at financial institutions which get asked often to provide a letter. Credit references usually start with the referring contact at the top, followed by the receiving party.
References should be short and to the point. They need to list dates over which you’ve had business with the reference and any relevant numbers like average account balances.
The example credit reference below is from a bank but most will look the same whether from brokerage or other financial institution. Personal character references won’t have the numbers but will speak to how many years the reference has known the person.
Credit references are not as important for people with good credit or long credit history but could mean the difference for bad credit borrowers. If you’ve got bad credit or no credit at all, keep a list of people or financial institutions that might be able to offer you a credit reference. Keep an account open with a local bank even if you don’t use it much so you can ask for a reference when you need one. Try to stay on good terms with landlords or others that have extended you credit to use them as a reference in the future.