Credit References: What They Are and When You Need One

A credit reference is anything that shows another party how you’ve handled money you owed: your credit report, a letter from a past landlord, or a supplier confirming that your business pays its invoices on time. Most of the time, your credit report is the only reference anyone asks for. You’ll usually need something more when you’re renting, opening trade accounts for a business, or applying with little credit history.

What is a credit reference?

A credit reference gives a lender, landlord, or supplier information about your financial reliability. They use it to confirm that you’ve paid bills on time or met agreed-upon payment terms.

There are several forms of credit references. A landlord may request a letter from your previous landlord. A business supplier might tell another business supplier about how consistently your company has paid its invoices.

Personal credit references

A personal credit reference speaks to your individual payment history. For example, a landlord might ask a previous landlord about your rent payments, or a creditor might request information from another lender you’ve borrowed from.

The person or company providing the reference should have firsthand knowledge of how you pay. A reference from someone who hasn’t lent to you or billed you, like a friend vouching for you, usually won’t carry weight.

Trade credit references

A trade credit reference usually applies to businesses. A supplier that sells products or services to your company on credit can serve as a reference for another supplier or a lender.

Let’s say you run a small business and order inventory from a particular supplier. If you pay its invoices within the agreed-upon terms, that supplier can vouch for your business when another vendor is deciding whether to sell to you on credit. Trade references help businesses establish credibility when they have limited credit history.‍

‍What makes a reference worth submitting?

Strong references — anyone who billed you and got paid, such as a landlord, a utility or phone company, an insurer, a credit union where you held a loan, or a supplier if you’re in business.

Weak references — friends, family, employers, or anyone offering a character reference. They can vouch for you, but they can’t document a payment history, and that’s what the lender is asking for.

The test: Could they look at a record and say when you paid and how much?

When do you need a credit reference?

In most situations, you’ll only need to agree to a credit check. Your credit report gives lenders detailed information about your accounts and payment history. You may need other references in these situations.

Renting an apartment

A landlord wants evidence that you’ll pay rent consistently. Your credit report can show some of that. A landlord could also ask for a reference from a previous property manager.

Applying for business credit

A lender or supplier might want confirmation that your business pays its obligations on time. Trade references are especially useful if your business is newer and hasn’t built much business credit yet.

Opening accounts with vendors or suppliers

A vendor may require references before letting you buy products or services and pay later. That arrangement, called trade credit, can help protect your cash flow. The vendor may ask for references from other suppliers that have already extended credit to your business.

When you have limited credit history

A thin credit file, meaning one with few accounts or little history, makes it harder for a lender, landlord, or supplier to judge how you’ll pay. A credit reference can add context. However, a reference letter doesn’t add anything to your credit report. The payment history lenders look for comes only from accounts that report to the credit bureaus.

Read more >> What Is a Thin Credit File?

How to get a credit reference

Start by asking the person or company requesting the reference what information they need and whether they use a specific form or format. Then choose a reference who can accurately verify your payment history, such as a previous landlord, lender, creditor, utility provider, or supplier.

Before you apply, check your credit reports free every week at AnnualCreditReport.com so you know what a lender or landlord will see.

What to include in a credit reference letter

A credit reference letter should include factual information that helps the recipient understand your payment history:

• Your name or business name
• The reference provider’s name and contact information
• The type of account or financial relationship
• The length of the relationship
• The credit limit or amount extended
• Whether you paid on time and within the agreed terms
• Any relevant account status information
• The date of the letter
• The reference provider’s signature

Read more >> How to Use a Paid-in-Full Letter (With Template)

Credit references vs. credit reports

A credit report comes from one of the three nationwide credit bureaus: Experian, Equifax, or TransUnion. It lists your credit accounts and payment history.

Other credit references include asset documents, such as recent statements from your savings, retirement, or investment accounts, and letters from landlords, suppliers, or other creditors describing how you’ve paid. Some applications also ask for a character reference, such as a letter from an employer.

Read more >> How to Read a Credit Report

Bottom line

A reference letter can fill a gap when your credit file is thin, but it only goes as far as the one application you attach it to. Payment history on your credit report goes everywhere you apply. The Kikoff Credit Account reports to Equifax, Experian, and TransUnion, with no credit check to sign up and no deposit. Each on-time payment adds to your history at all three bureaus. Plans start at $5 a month.