What Is a Credit Reference?

How Does a Credit Reference Work?

A credit reference, such as a credit report, helps a lender, landlord, utility or employer determine your creditworthiness.

For instance, a credit card issuer might examine your credit report to see your current amount of debt and your record of making on-time payments. Depending on the card issuer’s own requirements, the information contained in your credit report may mean your credit application will be approved or rejected. If you’re not using much of your available credit and you’ve consistently made on-time payments, a card issuer might extend credit to you. But if you’re using a lot of your available credit and you’ve racked up a not-so-great payment history, a card issuer might decline your application.

When Is a Credit Reference Needed?

Some of the most important aspects of your life may hinge on what someone learns when checking a credit reference. Applying for a credit card, loan, apartment lease, utility hookup or job often involves some sort of credit reference.

Credit Card and Loan Applications

When considering you for a credit card or loan, a lender typically pulls your credit report, the most common type of credit reference. They’ll comb through your report for information like:

• Number of revolving credit accounts (such as credit cards) that you have
• Number of installment loans (such as mortgages or auto loans) that you have
• Payment history
• Status of credit accounts, such as whether any payments are overdue
• Bankruptcy filings
• Recent credit inquiries

This information can help a lender determine whether to accept or deny your application.

Apartment Rentals

If you submit an application to lease a new apartment, the landlord likely will run a credit check in addition to obtaining a tenant screening report. The information found in either report can impact your chances of being approved for the lease.

Among other items, a landlord typically looks at this information in the credit report pulled as part of your credit check:

• Amount of debt
• Payment history
• Past-due accounts
• Closed credit accounts
• Bankruptcies
• Loan defaults
• Home foreclosures
• Car repossessions

Utility Signups

In some cases, utility companies check your credit when you’re signing up for service. A utility provider sifts through your credit report to review your history of timely (or untimely) bill payments.

If a utility is satisfied that you’re a responsible bill payer after reading your credit report, it’ll likely approve your request for service. Or it might agree to provide service but require a deposit if your bill-paying record isn’t ideal. And, of course, the utility might decide against supplying services due to unfavorable information in your credit report.

A utility must get your permission before checking your credit report. If you decide against going through a credit check, you may be able to provide a credit reference letter from another utility where you were a customer.

Employment Credit Checks

Before it extends a job offer, an employer might order a credit check to see how responsible you’ve been with your finances. This is required by law in some financial industries or may be an employer’s policy, especially if the position deals with company finances. This credit check gives details about your credit, such as account and bankruptcy histories, and might turn up a list of current and past employers.

However, an employment credit check leaves out a key piece of information that normally shows up in a credit report: your year of birth. This is designed to help prevent age discrimination in hiring. Employers also cannot obtain your credit score when running a pre-employment credit check.

Types of Credit References

Credit references come in several forms. They include:

• Credit reports: A credit report is widely used as a credit reference for potential borrowers, tenants, utility customers and employees.
• Asset documents: As the name suggests, this document lists your assets, such as checking, savings, investment and retirement accounts. An asset document can help demonstrate how financially stable you are.
• Character references: In some cases, a credit reference may not be a paper document. Instead, it might involve contacting someone by phone, such as a former landlord, boss or lender, who can verify that you were a good tenant, employee or customer.

The Bottom Line

A credit reference can boost or sink your chances of getting a credit card, mortgage, apartment, utility service or job. Before someone else obtains your credit reference, it’s wise to check your free Experian credit report to see how your lenders are reporting your information and make any necessary changes that could help improve your chances of obtaining the credit or services you need.