Credit Reference: What it is, Effect on Credit Score

What Is a Credit Reference?

Before lenders will extend credit to would-be borrowers they typically require documentation that attests to that person's or company's ability to repay. A general term for that documentation is a credit reference. Credit reports from the major credit bureaus are widely used as credit references for individuals. Credit references can also take the form of asset documentation as well as letters from previous lenders and personal or business acquaintances. In addition to lenders, credit references are often required by landlords checking out prospective renters.

Types of Credit References

Three common types of credit references are credit reports, asset documentation, and reference letters. Here is how they work.

Credit Reports

Banks and other lenders typically request a copy of a person's credit report when they apply for some form of credit, such as a loan or credit card. Three major credit bureaus—Equifax, Experian, and TransUnion—issue those reports, which consist of information on individuals' credit usage, such as how much they owe and whether they are making their payments on time. The bureaus sell their reports to lenders, landlords, employers, and other businesses.

The credit bureaus rely largely on information supplied to them by the individual's current and past creditors. Since not all creditors submit information to all three bureaus (and some submit to none at all), credit reports can differ from one bureau to another. For that reason, lenders may consult multiple credit reports, especially when someone applies for a sizable loan, such as a home mortgage.

The information in credit reports is also used to compute an individual's credit scores, following formulas developed by FICO and VantageScore. Credit scores, which lenders and other interested parties may also request as part of their decision-making process, are not included in credit reports but often available from the same sources.

Credit rating agencies, such as Fitch Ratings, Moody's Investors Service, and S&P Global, collect similar information on businesses, governments, and other entities. They issue credit ratings, which perform a similar function as credit scores for individuals, but employ a letter-grading system rather than numbers.

Asset Documentation

While credit reports contain a wealth of data, there is some information they do not provide. That includes any details on a person's assets or income. So, if a creditor is interested in how much money a person has in the bank or what kinds of investments they own, the applicant will have to provide that separately, typically in the form of account statements issued by the financial institutions. For income verification, they may need to supply their pay stubs and/or income tax returns.

Letters of Reference

To bolster their case for why they're a good candidate for a loan (or an apartment), the applicant might also want to request reference letters from former lenders, ex-landlords, or people who simply know them well. Such letters will typically attest to the person's creditworthiness and sometimes to their character, such as how honest, hard-working, and reliable they are and how long the letter writer has known them.

People who provide these kinds of reference letters are not taking personal responsibility for any debts, as they would be if they agreed to be cosigners for a loan.

Rather than (or in addition to) letters, some lenders and landlords may request the contact information for a person's references in order to call them directly.

The Bottom Line

Before lenders will issue credit they want to be reasonably confident that they will be paid pack. Similarly, landlords want to know that a prospective tenant will pay their rent. Credit references help provide that assurance. For would-be borrowers or renters, lining up references in advance (and checking their credit reports for any damaging inaccuracies) can help the process go smoothly.