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A credit reference, just like a referral for a job, is a reference from a trusted source that lenders use to approve an application for loans or credit.

Depending on who provides the referral, a credit reference could well mean the difference between the applicant being approved or declined for credit.

Technically, a credit reference could also come from information gleaned from a regular credit report, as those reports are the fruit of the evaluation work completed by credit agency professionals, and are also highly trusted by lenders and creditors.

For the purposes of this article, the focus in on external credit references that come not from traditional credit reports, but from credit referral written and verbal correspondence.

Credit references offer value to lenders that go beyond traditional credit reports - the primary tool lenders and creditors use to weigh an applicant's credit risk. A credit reference usually comes from another creditor, a professional or personal acquaintance of the applicant's, or a financial institution like a bank or credit union.

In providing a credit reference the referring party isn't tied to the approval of credit or a loan, as is a co-signor. The referring party simply provides a letter of reference attesting to a credit applicant's character and his or her ability to pay bills on time (a business applicant may also benefit from a credit referral.)

In some cases, a phone call between a credit referral provider and a lender is enough to formalize and complete the lender's request for a credit referral.

How Does a Credit Reference Work?

A credit reference kicks off with a request from a lender or creditor for a letter or other form of credit reference. Often, a lender will note the credit reference could be the determining factor in getting credit approval, so the applicant needs to get on the ball and act fast.

These actions will get the process rolling:

Check With the Lender for Instructions

If you get a request from a lender for a credit reference, check with that lender and ask what specifically they need to see in the letter. The lender might provide a sample blueprint to follow, a letter template they already use, or have it supply a list of specific areas to cover in a credit reference. No matter what information is required, you'll want to know beforehand, so a call or email chat with your lender is highly recommended.

Choose Your Credit Reference Provider 

Different lenders may have different criteria for the perfect credit reference provider and again, it always helps to ask what they want. That said, any credit provider, like a bank, credit card company, utility company, or auto loan financing firm is usually a good bet to be your credit reference provider.

Supply Permission to Release Your Personal Information 

Some letters of reference providers, like banks or credit card companies that already hold your personal data, will likely ask your written permission to discuss or release your personal financial data. A financial institution also likely uses its own form for credit references, and it's worth asking for that form, too. Once you're clear on what the credit reference provider needs, issue an authorization that gives the letter writer a green light to release your personal data, if needed. If not, they may elect not to act as a credit reference.

Make Sure This Information Is Included 

Most lenders and creditors will likely ask for the information they need for a completed credit reference document. To be sure, however, make sure you include your payment history if your letter of reference provider is a creditor (like a credit card company or auto financing firm). Also, make sure to include any relevant account numbers and the time period your business relationship, i.e. the number of years you've been with a credit company, for example.

Any case that you can make that you're a good credit risk -- and payment history, account numbers, and length of a relationship are good indicators -- needs to be included in your credit reference documentation.

Different Types of Credit References

A request for a credit reference may come in different business scenarios.

For Individual Credit References 

A letter of credit reference or a phone call to the creditor is often used for unique credit decisions, like a landlord requiring additional references before approving an apartment rental, or a younger financial consumer with minimal credit history looking to buy a new car. Sometimes, lenders just want reassurance that a credit applicant they want to approve, but don't have enough information to do so, is a good credit risk. A credit reference may be the driving force that leads to credit approval in the above scenarios.

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For Business Loans 

Small businesses may find it more difficult to land a

line of credit

or business loan, even with good credit. But a credit reference from the company's business partners, vendors, or venture capitalists may be the push a bank needs to OK a business loan.

For International Requests for Credit

If a credit applicant from a foreign country wants to do business in the U.S., a letter of reference (or more) may be requested by a lender before any financing approval is granted for an overseas firm that a creditor doesn't know. Again, a good letter of reference from a business partner or funding source may turn the tide and get the needed credit approved.

For Large Cash Loans 

Credit references are especially useful for creditors when there is more money, and subsequently more risk, on the line in a credit decision. By requesting and getting a reference letter from a trusted source, the creditor has taken a needed "extra step" in properly vetting a credit applicant before issuing approval.

An Individual Loan Between Friends or Family 

When regular folks get together on a cash loan a credit reference can come in handy. Let's say you want to borrow $10,000 from a friend for a down payment on a new home. A credit check may be in order, depending on the lender's level of trust. But if the borrower offers a letter of reference from her bank, credit card company or former mortgage company that demonstrates prompt payment, that credit reference could be enough to close the deal.

For Electricity or Other Household Utilities 

Main Street consumers, especially younger adults with little or no credit history, may be asked to provide a letter of credit before being approved for gas, water, utilities, or cable and internet services in an apartment or new home. Often, a utility or household services provider will take a letter of reference in lieu of a cash down payment before turning on the lights. That's because utility companies don't often use credit reports for service applicants, thus the need for a credit reference to secure services.

Use These Tips to Boost Your Chances

Provide Extra Information

Your credit reference letter should include enough data to get your credit application approved. Just to be sure, add extra documentation like tax returns (for proof of income) and any extra assets, like stocks, bonds or insurance, that you might use as


, if needed.

Include an Ample Cash Deposit

If you're unsure if your credit reference letter will clear you for a loan or credit, include an offer for a cash deposit as collateral, too. The offer will show you're serious about demonstrating your good credit and could help you get approval.

Use Alternative Credit Reports                                

Your creditor or lender already has seen your FICO credit reports, but they may not have seen all the information you have to offer to prove your creditworthiness.

An alternative credit report can help financial consumers with no credit history build a record of credit and on-time payments. Online alternative credit report services like eCredable and Experian's (EXPGY) RentBureau can hook you up (for a fee), and might even negate the need for a credit reference if your payment history is strong enough.

Offer Up a Character Reference  

One form of a credit reference that can pay off in special situations is a character reference. A character reference doesn't rise to the level of a credit reference, but a carefully crafted letter supporting your good character and prudent financial habits may help you get the credit you want.

Don't ask a family member to provide one. Instead, ask a former landlord from college, a previous employer who can attest that you showed up on time and put in extra effort on the job, or even a college professor who gave you good grades. Believe it or not, lenders and creditors also make credit decisions based on good ethics and a strong educational and workplace background. Take advantage of that fact with a robust character reference.

Stay on Top of Your Credit Score

Keeping tabs on your credit score, especially at a time when you're asking for a large loan or new credit card, is a no-brainer. Make sure you're paying your bills on time, not using credit cards a lot, and reviewing your credit report to ensure there are no errors on it. That way, when a credit reference request is made, you'll be in a good position to pass any credit review checks with flying colors.

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