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Credit references are documents that describe your credit history background and creditworthiness to potential lenders. You may need these if you’re looking to borrow money, like a loan, or rent from a landlord. If you’re familiar with a job resume referral, these are pretty similar — credit references allow lenders to base your credit approval off of a trusted source and verify your income.
For starters, credit references will give insight as to whether or not you were able to make payments on time, or if you have any debt. If you have a low credit score and haven’t paid off your debts in a reasonable time, your credit application may be more likely to get rejected. On the other hand, if your credit history shows that you’ve been making timely payments and paying off any debts, the lender will be more likely to approve your application.
In addition to credit reports, other types of credit references include asset documentation, financier support, and character references. If you’re planning on borrowing money in the future, it’s important to be aware of the types of credit references.
When Should You Use A Credit Reference?
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When you’re looking to borrow money from a service or a lender, a credit reference is usually requested. These types of requests come in several forms depending on the situation and who you’re borrowing money from. These are the most common situations in which you would need a credit reference:
- Rental applications: When you fill out an application to rent, a landlord or property manager will almost always request a credit reference. What they’re looking for is if you’ll be able to make payments on time.
- Loan applications: Lenders often request credit references when an individual or business fills out a loan application. Providing these references will let a lender know if the applicant is in a good position to be able to pay back money that’s borrowed.
- Utility services: Prior to activating utility services such as gas, electricity, phone services, or cable, credit references are usually requested by the service provider. This lets them know if you have a history of paying your utility bills on time.
The Different Forms of Credit References
A request for a credit reference can come in many different forms. Different types are used in certain situations and all of them have varying levels of effectiveness. Read below to explore each type of credit reference in greater detail:
1. Credit Reports
Credit reports are the most commonly used credit references by lenders, landlords, and employers, and are used to track an individual’s or business’s credit history. By looking at an individual’s credit report, lenders can determine the level of risk associated with approving an applicant.
Within a credit report, potential lenders will review certain factors such as the age of your accounts, debts, and credit inquiries. Any negative signals, such as a high number of credit inquiries and a large amount of debt will be viewed as a red flag to a lender and will lessen your chance of approval.
Credit reports are the most effective credit reference type as they contain concrete information pertaining to an individual’s credit history and give insight into a borrower’s reliability.
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