Lenders want to make sure they’re lending to those who are trustworthy enough to make timely loan payments. While there are several factors lenders assess to ensure your credibility, one thing they might request is a credit reference. This provides lenders with a way to assess your financial trustworthiness by looking at your credit history. Essentially, a credit reference represents your financial reputation.
Key Points:
- A credit reference is a letter or statement from a previous lender or creditor that verifies your financial reliability.
- Credit references typically include information about your payment history and lender feedback.
- The purpose of a credit reference is to help lenders assess your financial reliability by providing details about your past borrowing and repayment behaviour.
What Is A Credit Reference?
A credit reference is a document or source that provides insight into your financial reliability. It allows lenders, landlords, utility companies, and even employers to assess how trustworthy you are with money.
Why Is A Credit Reference Important?
Credit references help individuals or companies determine whether to approve your application for a loan, rental, or service. They offer a more complete picture than just your credit score, especially if you have limited credit history or are applying for a large loan amount.
| What’s The Difference Between A Credit Reference & A Personal Reference? There may be times when you may be asked for a personal reference, in addition to or instead of a credit reference. But there are key differences between the two: Credit Reference: A credit reference is a source of information that details your financial background, as mentioned. It’s usually a letter or statement from a previous lender that highlights your past borrowing habits and repayment history. Personal Reference: In contrast, a personal reference is someone who can attest to your character and dependability. This type of reference is used to evaluate characteristics like honesty, reliability, and trustworthiness, which can help lenders, employers, or even landlords determine your overall integrity. Essentially, a personal reference shows who you are as a person, while a credit reference reveals how you manage your financial obligations. Learn more: Do You Need A Personal Reference For A Loan? |
Who Can Be A Credit Reference?
A credit reference can come from a variety of sources. Basically, anyone who can vouch for your financial reliability and payment history may serve as a credit reference. Here are a few examples:
- Previous Lenders: This includes banks, credit unions, payday lenders, or any other financial institution that has extended credit to you. They can confirm your repayment history and whether you made payments on time.
- Landlords: If you’ve rented in the past, your previous landlord can provide a reference confirming on-time rent payments.
- Utility Providers: Companies like Hydro One, Enbridge, or Bell can verify your history of paying bills for various services.
- Professionals: Accountants, lawyers, or business associates may be able to speak to your financial conduct, especially when it comes to how you’ve handled business transactions.
What Kind of Information Do You Have To Provide On Your Credit References?
A credit reference should give lenders or service providers a clear picture of your financial reliability. As such, these letters or statements should include the following:
- Type & Length Of Relationship: How long you’ve been a customer or client, and the nature of your relationship, should be included.
- Credit Reference’s Name & Contact Information: Include the name of the organization or individual, as well as their contact information.
- Payment History: Important details surrounding your payment history should be detailed, including whether you’ve made on-time payments or have had any missed or late payments.
- Credit Usage: Include information about how much credit you’ve used or repaid, and whether you have any outstanding balances.
| Sample Credit Reference Letter: “To Whom It May Concern, This letter confirms that [Client Name] has maintained a credit account with us since [Start Date], consistently making payments on time. Their account remains in good standing with no history of delinquency. Please contact us for any further details. Sincerely, [Reference Name & Contact Info]” |
What Kind Of Lenders Require A Credit Reference?
There are several lender types that may request a credit reference, including the following:
Car Loan Lenders
Car financing often involves large sums of money, given the cost of vehicles. Auto lenders want assurance that you’re a responsible borrower when you apply for a car loan. A credit reference can support your loan application, especially if your credit score is not as high as it could be.
Personal Loan Lenders
Whether you’re applying for a small unsecured loan or a larger installment loan, lenders may ask for a credit reference to verify your payment history and financial habits. This is particularly true for alternative lenders than banks.
Alternative lenders typically have less stringent regulations for credit scores and income sources, making them an ideal financing source for subprime borrowers. That said, they may still request a credit reference, especially given the higher risk they assume when extending a loan to someone with limited credit history or poor credit.
Mortgage Lenders
When applying for a mortgage, a credit reference may be requested by your lender to provide a fuller picture of your financial behaviour. Considering the magnitude of a home loan, a credit reference showing that you’re a responsible borrower can be reassuring to lenders who are extending a very large loan amount.
Learn more: Requirements for a Mortgage Loan
Business Loan Issuers
If you’re applying for a business loan, lenders may request credit references from suppliers or financial institutions to accurately assess your business’s creditworthiness.
Do Banks Ask For Credit References?
In certain situations, banks will request a credit reference. This is not typical, since the bank will generally rely on internal records supplemented by your credit history. Still, should you have a small credit history, be new to the country, or just starting out, there is limited information on your file.
Reasons Lenders Ask For Credit References
Lenders may have many reasons for requesting a credit reference, such as the following:
Default On A Previous Arrangement
Anytime you fail to pay a bill (even a phone payment) on time, the record of the default shows up on your credit report. Therefore, if a potential lender can see that you have even a small history of defaults, they may want something to substantiate your lending worthiness.
History Of Exiting Your Agreements Early
While not technically a default, if you left arrangements early and simply paid the fees, it can impact your ability to get a loan. For instance, if you had a loan for a vehicle and sold it early, it may give pause to a potential lender.
Since most of the profit is in the interest, it matters that the client sees loans through. Therefore, they may request a credit reference.
Limited Credit Information
Another reason that lenders request references is simply a lack of credit information. Perhaps you lived off of savings for some time, dealt mainly at arms-length, or have just begun your career. Or, maybe you’re a newcomer to Canada and have yet to establish a Canadian credit history.
To get a better picture of your credit situation, the lender is likely to request some form of attestation.
Bankruptcy Or Consumer Proposal
It takes quite some time for both a bankruptcy filing and a consumer proposal to leave your credit record. If you’ve filed for bankruptcy or consumer proposal in the past, you can expect any future lenders to request a statement from a reference.
High Debt-To-Income Ratio
While there are general requirements regarding a borrower’s debt-to-income ratio, some lenders may have an even more stringent ratio. If you plan to request an exception, be prepared to offer up references to substantiate your ability to pay and track record of doing so.
Learn more: What Is Debt-To-Income Ratio And How To Calculate It?
Credit Reference vs. Credit Report
Lenders often pull an applicant’s credit report to evaluate your creditworthiness. But credit reports and credit references are not exactly the same:
| Credit Reference | Credit Report | |
| Purpose | Verifies financial reliability | Provides a detailed history of your credit activity & behaviour |
| Format | Letter or statement from a lender, landlord, or utility company | Formal document issued by the credit bureaus |
| Information Provided | – Payment history – Account status – Credit limits | – Credit accounts – Account balances – Payment history – Credit inquiries – Public records |
| Sources | – Creditors/lenders – Landlords – Service providers | Credit bureaus |
Final Thoughts
A credit reference is your financial reputation, providing lenders with proof that you’ve borrowed and repaid responsibly in the past. Whether it’s a lender, landlord, or utility company, credit references are used to help lenders decide if you’re trustworthy with money. So make bill payments on time and keep your credit in good shape.
