What is a credit reference? Before lenders in the industry will extend any form of credit to borrowers they usually require a form of documentation that attests to the ability of the person or company to repay. And that very type of documentation in general terms is a credit reference.
What Is a Credit Reference
Credit reports that come from the major credit bureaus are widely used as credit references for individuals. Credit references also can take the form of asset documentation as well as letters that are from previous lenders and personal or business acquaintances. And in addition to lenders, credit references are at most times required by landlords when checking out prospective renters.
That being said, that’s everything in regard to the definition of a credit reference. And now that’s out of the way let’s learn about the various type of credit references and how they work
Types of Credit References
There are various types of credit references and in this post, I will be focusing on the most three common of the types and they are credit reports, asset documentation, and reference lender and most of which you already should have heard about. And with that being said, here is how they work.
Banks as well as many other lenders typically request a copy of the credit report of a person when they apply for some form of credit, such as a loan or a credit card. Three major credit bureaus which are Equifax, Experian, and TransUnion as you should know issue those reports, which majorly consist of information on the credit usage of an individual, such as how much they owe and whether they also are making their payments on time. The bureaus in question sell their reports to lenders, landlords, employers, as well as many other businesses.
The credit bureaus mainly rely largely on information that is supplied to them by the current and past creditors of the individual. And since not all creditors get to submit information to all three bureaus (and some even submit to none at all), credit reports can always differ from one bureau to another. And for that very reason, lenders may get to consult multiple credit reports, especially when someone gets to apply for a sizable loan, such as a home mortgage.
The information that is available in credit reports is also used to compute the credit scores of an individual, following up with formulas that are developed by FICO and VantageScore. Credit scores, which most lenders and other interested parties may also request as part of their decision-making process, are however not included in credit reports but at most times available from the very same sources.
And while credit reports contain a ton load of data, there is some information in question that they do not provide. And that includes any details on the assets or income of a person. So, if it is that a creditor is interested in just how much money a person has in the bank or what kinds of investments they own, the applicant will then have to provide that separately, typically in the form of account statements that are issued by the financial institutions. For income verification, on the other hand, they may however need to supply their pay stubs and/or income tax returns.
Letters of Reference
In a bid to bolster their case for why they are a good candidate for a loan (or an apartment), the applicant in question might also want to request reference letters from former lenders, ex-landlords, or even people who simply know them very well. Such letters in question will typically attest to the creditworthiness of a person and sometimes to their character, like how honest, hard-working, and reliable they are and just how long the letter writer has known them.
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