Having a favorable credit report is by far the best way to get a loan or new credit card or to sail through the process of renting. But you’re not doomed if you have bad credit or just limited credit experience. That’s where credit references are super valuable. If you’re creative and stay on top of documentation, you may be able to further yourself even if your credit report doesn’t sing your praises. What is this credit reference? Essentially, it’s an affirmation from “any entity that is able to speak to your creditworthiness so it could be your credit card company, a utility or telephone company,” Latha Ramchand, former dean of C.T. Bauer College of Business at the University of Houston, told U.S. News.
It’s important for anyone to know how to get the most from a credit reference, but especially if you have bad credit or haven’t been using credit for long. Here’s how to handle the process:
When credit reports don’t help your cause
A credit report is the first thing most lenders turn to when you apply for a loan. Potential landlords and even hiring managers use them too. But it’s not that simple to have a good score. Even if you excel in some of the areas that impact your credit report, like paying on time or using only a small portion of your available credit, you may not have the score you need. A few of the culprits there include not having a suitably lengthy credit history, an appealing mix of credit, or, if you’re fresh out of school, not having a job history or any credit cards at all. That’s where a credit reference can come to the rescue. These can run the range from pay stubs to a paid-on-time utility bill record to an alternative credit bureau like Experian RentBureau that tracks your former rent payments (if your landlord reports them to that bureau.)
Gotta have documents
Much as you wish they would, no one is going to take your word for it when you say you can confirm your financial situation separate from your credit report. So you’ll have to come up with documentation, but you might be pleasantly surprised to learn what will work in this situation. Basically, your potential landlord or lender needs proof that your finances are sound, and so is your approach to earning and spending money. While they won’t necessarily tell you this is so, they may accept one or more of the following:
1. A copy of your last year’s income tax return, either electronic or paper
2. Pay stubs that are more recent, including a screenshot from Paypal or similar third-party payees if you are self-employed
3. A letter from your employer verifying that you work at their place and are likely to continue on
And remember to provide tangible evidence of smart investments if you have any, including stocks and money market accounts, sure, but also 401(k) investments, TIPS marketable securities, and even those bonds your grandma might have given you at graduation. The general idea is to demonstrate that you handle money well, in a way that anyone concerned with your creditworthiness can see for themselves.
Question your own character
A character reference is another quite useful option when you’re trying to get credit, particularly when you’re after a car loan or a lease on a place to live. This might be your only way around paying several months rent as a deposit, so give it your best shot. Just a few of the people who might do a character reference that could help your cause include former bosses, teachers, off-campus landlords, and even the utility or cell phone company if you’ve always paid them regularly.
But don’t waste your time with glowing character references that no one will look at. Instead, ask your potential lender or landlord what type of reference would have the most impact. And just like a job reference, it really helps if you do the legwork for the entity you’re asking to provide the letter. Furnish them with a quick cheat sheet of points to emphasize, like “Adam always paid his bill on time even when his seasonal job ended.” If you’re asking for documentation for a potential landlord, you’d want a character reference that could speak to your quiet nature or demonstrated responsibility with money. If you want to lease a car, the emphasis might be on your driving ability and the way you keep your vehicles clean and smooth-running.
For any character reference letter, make sure you provide your source with a list of start and end dates, your name and address, and anything else they’d otherwise need to look up or cross-reference. And use common sense: Unless your partner in an eBay enterprise or the neighbor who collected car payments from you for 18 months actually likes and respects you, move on to someone else for a character reference. And don’t overlook character references as a way to explain gaps or blips on your credit score. You can ask a doctor’s office to verify that medical issues caused you to let a few bills lapse for a while, for example. Or enlist the utility company’s help in explaining how unseasonable weather made bills outrageous there for a while, affecting your ability to make other payments in a timely fashion.
The end game
Granted, credit references may not have an immediate impact, particularly if you have bad credit instead of just a too-short history with loans and credit cards. But even the times you get denied credit can help you increase your chances of getting the next loan. Anytime you’re turned down, a lender is required by law to send you an “adverse action letter” that targets the reasons why. Once you understand what’s working against you, you can fine-tune your approach. Target your additional credit references in a way that lets lenders know why you’re a good risk anyhow, and you may have better luck next time.