Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated May 31, 2023 Reviewed by Reviewed by Thomas J. CatalanoThomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Before lenders will extend credit to would-be borrowers they typically require documentation that attests to that person's or company's ability to repay. A general term for that documentation is a credit reference. Credit reports from the major credit bureaus are widely used as credit references for individuals. Credit references can also take the form of asset documentation as well as letters from previous lenders and personal or business acquaintances. In addition to lenders, credit references are often required by landlords checking out prospective renters.
Three common types of credit references are credit reports, asset documentation, and reference letters. Here is how they work.
Banks and other lenders typically request a copy of a person's credit report when they apply for some form of credit, such as a loan or credit card. Three major credit bureaus—Equifax, Experian, and TransUnion—issue those reports, which consist of information on individuals' credit usage, such as how much they owe and whether they are making their payments on time. The bureaus sell their reports to lenders, landlords, employers, and other businesses.
The credit bureaus rely largely on information supplied to them by the individual's current and past creditors. Since not all creditors submit information to all three bureaus (and some submit to none at all), credit reports can differ from one bureau to another. For that reason, lenders may consult multiple credit reports, especially when someone applies for a sizable loan, such as a home mortgage.
The information in credit reports is also used to compute an individual's credit scores, following formulas developed by FICO and VantageScore. Credit scores, which lenders and other interested parties may also request as part of their decision-making process, are not included in credit reports but often available from the same sources.
Credit rating agencies, such as Fitch Ratings, Moody's Investors Service, and S&P Global, collect similar information on businesses, governments, and other entities. They issue credit ratings, which perform a similar function as credit scores for individuals, but employ a letter-grading system rather than numbers.
While credit reports contain a wealth of data, there is some information they do not provide. That includes any details on a person's assets or income. So, if a creditor is interested in how much money a person has in the bank or what kinds of investments they own, the applicant will have to provide that separately, typically in the form of account statements issued by the financial institutions. For income verification, they may need to supply their pay stubs and/or income tax returns.
To bolster their case for why they're a good candidate for a loan (or an apartment), the applicant might also want to request reference letters from former lenders, ex-landlords, or people who simply know them well. Such letters will typically attest to the person's creditworthiness and sometimes to their character, such as how honest, hard-working, and reliable they are and how long the letter writer has known them.
People who provide these kinds of reference letters are not taking personal responsibility for any debts, as they would be if they agreed to be cosigners for a loan.
Rather than (or in addition to) letters, some lenders and landlords may request the contact information for a person's references in order to call them directly.
The rules on who can access credit reports are governed by the federal Federal Fair Credit Reporting Act. Generally speaking, creditors and potential creditors, insurance companies, government agencies, landlords, and employers can all obtain your credit report if they have a legitimate reason for doing so. While much of this might happen behind the scenes and without your knowledge, according to the Consumer Financial Protection Bureau, "You must provide written consent before a prospective or current employer can get a copy of your credit report."
Under federal law, you can put a freeze on your credit report, which will stop certain kinds of businesses from looking at it. However, there are many exceptions, including insurance companies, government agencies, employers, landlords, and companies you currently have accounts with. Freezing your credit report is free, but you will need to contact each credit bureau separately. In addition, you will have to lift the freeze if you wish to apply for new credit.
You can obtain your credit reports from all three major credit bureaus at the official website, AnnualCreditReport.com. By law you are entitled to at least one free copy from each bureau every 12 months. If you find information that you believe to be incorrect, you have the right to challenge it, and the credit bureau is required to investigate and get back to you. For that reason it is often a very good idea to request and review your credit reports before you apply for new credit.
Not to be confused with a credit reference letter, a letter of credit is a letter from a bank guaranteeing that the seller in a transaction will receive payment from the buyer (or, if need be, from the bank). Letters of credit are commonly used in international trade.
Before lenders will issue credit they want to be reasonably confident that they will be paid pack. Similarly, landlords want to know that a prospective tenant will pay their rent. Credit references help provide that assurance. For would-be borrowers or renters, lining up references in advance (and checking their credit reports for any damaging inaccuracies) can help the process go smoothly.