What Is a Credit Reference?

Your credit report is your most well-known — and valuable — credit reference. But it’s not the only one you have. A credit reference can take on many different forms.

For instance, each individual account listed on your credit report is also considered a credit reference. And some credit references don’t show up on your credit report at all.

“A credit reference could be from any entity that is able to speak to your creditworthiness, so it could be your credit card company, a utility or telephone company,” says Latha Ramchand, provost and executive vice chancellor for academic affairs at the University of Missouri and former dean of the C.T. Bauer College of Business at the University of Houston.

So, don’t fret if you don’t have a credit report that sings your praises. A sparse or unfavorable credit report is often the case if you have limited credit or bad credit. Or maybe you just graduated from college and you’re trying to get your first job. In these situations, your credit report needs a little assistance, and you just have to get a little more creative.

It’s important to know all of your options, so read on and find out how you can use a variety of credit references to your advantage.

Types of Credit References

Let’s start with the most common reference, your credit report. If you have limited credit, don’t worry, we’ll talk about how to get around that, too.

Credit reports. It’s important to make sure every little thing on your report is accurate. Every 12 months, you’re entitled to a free annual credit report from each of the three major credit bureaus, Equifax, Experian and TransUnion. Take advantage of the freebies and review your reports. If you have negative items, make sure all details, especially the dates, are correct.

A lender will look at your credit history, any negative items you have and how much debt you’re carrying. Lenders also look at a number of other things, including the amount of credit inquiries you have. Too many inquiries suggest you might be in financial trouble.

Your potential lender looks at your overall report to judge your creditworthiness. Remember, if you’re applying for credit, the lender will be looking at your credit score, too. If you’re applying for a job, a potential employer might look at your credit report but not your credit score.

[Read: The Best Starter Credit Cards.]

For millions of consumers, providing a positive credit report is a real problem. According to a 2015 study by the Consumer Financial Protection Bureau, as of 2010, 26 million consumers were “credit invisible,” meaning they had no records at the major credit bureaus. Another 19 million had credit files, but their credit records were deemed “unscorable.” Of the latter group, about half were unscorable due to insufficient credit history, and the other half lacked recent credit history.

If you’re part of the “invisibles” or the “unscorables,” providing additional references when you apply for credit is essential.

Character references. This type of reference doesn’t carry as much weight as your credit report does. But it can still be a valuable addition to an application, especially for someone who is trying to lease an apartment or buy a car.

“Character references never hurt. If (an applicant) stayed off campus and paid rent, that could be used to serve as a reference. Or the utility company they used could also serve this role,” says Ramchand.

If you want to use character references, think carefully about whom to ask. Don’t forget about former employers or even professors who liked you. It can be hard to ask someone to be a reference, but don’t be shy. Maybe that person once needed credit references, too.

What should the reference say? It doesn’t hurt to ask a lender what it’s looking for in your specific situation. When you ask someone to write the letter, give them enough details so they can address the issues that might be in question.

For instance, if you’re applying for an apartment, then the letter should address your responsibility with money and your respect for property that doesn’t belong to you.

[Read: The Best Student Credit Cards.]

Documentation. Your potential landlord or lender wants proof that you have sound finances. Be prepared to share copies of income tax returns, pay stubs and maybe a verification letter from your employer stating that you’re employed and that it’s a stable situation.

If you have investments, then here’s an opportunity to show proof that you are managing your money well. Ask your financial institution to provide you with the necessary documents. Obviously, if you have a strong credit history, you probably won’t need to gather so much information.

Alternative credit reports. You can also check into the services offered by alternative credit bureaus. “If the renter has no history, the only way they can be approved is if they pay two or even three months of rent toward a security deposit. This would lock out most applicants since it could be quite a lot of money,” says Steve Ely, CEO of eCredable, an alternative credit bureau that verifies consumers’ payment histories for things such as rent and utilities.

There are also other alternative credit bureaus that might be helpful to you. Experian RentBureau tracks rental payments — ask your landlord if they report payments to Experian RentBureau. Another one, Payment Reporting Builds Credit, is registered with the Consumer Financial Protection Bureau. PRBC is free, but some of the other alternative credit bureaus have fees, so read the fine print before you agree to anything.

[Read: The Best Credit Cards for Bad Credit.]

Smart Ways to Use a Credit Reference

It’s hard to get credit if you don’t have credit, isn’t it? Well, it’s hard, but not impossible. Now that you know so much about credit references, here are some super smart ways to use them to your advantage:

— Check one of your free annual credit reports once every four months. That way, you spread them out over the year and have a chance to catch an error or fraud that can bring down your credit score.

— Use reference letters not only to address your stellar character, but also to explain negative items on your report. For instance, a letter can point out extenuating circumstances, such as a medical issue, that caused you to get behind on a few bills.

— Learn from an adverse action letter. If you’re denied credit, the Fair Credit Reporting Act requires the lender to send you an adverse action letter. This letter must explain why you were denied, which credit bureau was involved and which credit score was used in the decision. If possible, use the information from the adverse action letter to correct your shortcomings with additional credit references and ask the lender to reconsider your application.

— Consider a secured credit card to start building credit. If used responsibly, such a card can be a no-stress way to build or rebuild credit.

— Check with your bank or a credit union about opening a credit-builder loan. With some of these loans, the amount of the loan is placed in a savings account that is inaccessible to you. You then make payments on the amount borrowed to build your credit history.

Getting credit is a big problem for millions of consumers, but there’s still hope if you can use credit references strategically. Sometimes, it takes as much resourcefulness as you can muster, but be persistent and you’ll break through.

More from U.S. News

What to Do After Being Denied for a Credit Card

Your Basic Guide to the Big Three Credit Bureaus

How to Choose the Right People to Be Your References

What Is a Credit Reference? originally appeared on usnews.com

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