How Credit Reference Letters Work
Tips and Samples to Help You Get Approved
When you’re a brand-new customer with a supplier, lender, or utility provider, those service providers don’t know if you’ll pay your bills on time. As a result, it’s risky for them to provide anything on credit (without requiring payment up front). But a credit reference letter might help you get more favorable terms on the loan or service you need.
What Is a Credit Reference Letter?
A credit reference letter is a document that describes your payment history with a business you've worked with in the past. Recipients use the letter to learn more about your finances and decide what level of risk to take with your account.
Letters (like the samples below) typically provide details about your account, such as the length of your relationship and the types of services you use. If you’re behind on payments or if you make a habit of paying late, the letter should also include that information. References letters come from your previous (or ongoing) service provider and go to your new (prospective) service provider.
A credit reference letter can help you get approved for services based on your dealings with suppliers you’ve previously used. The reference provider vouches for you, making the letter recipient more comfortable with extending credit. These letters are also called letters of good credit or “good standing.”
Same as credit reports? Your personal credit reports are similar to a credit reference letter, but there are significant differences.
- Credit reports contain information from a variety of sources that are combined and centralized at credit bureaus, and they are subject to strict consumer-protection laws. Sources primarily include lenders and public records.
- Credit reference letters are more informal, and they go directly from one business to another. Almost everybody has credit reporting data somewhere, but reference letters only exist when you ask for one. What’s more, these letters help you establish business credit.
Why You Need a Credit Reference Letter
Credit scores and reports are standard for consumer loans, but they aren’t the right solution for every situation.
Utility services: When you sign up for services like gas, water, electricity, or phone service, you might need to provide a letter before activation. Those providers often demand that you make a deposit before providing services, but it may be possible to get the deposit requirement waived if you can show that you have a history of paying similar service providers on time. Utility providers typically do not use traditional credit reports—they don’t report payments to credit bureaus, nor do they request credit scores.
But you can benefit from credit reference letters, which accomplish the same thing as a healthy credit score.
Business loans and suppliers: Traditional credit scores like the FICO credit score are helpful for consumer loans, but they don’t work for business loans (unless you use your personal credit to borrow for your business). Business credit scores exist, but many companies do not have credit scores—or the scores are low. However, suppliers may be willing to extend credit, such as 30- or 60-day payment terms, based on favorable references from other vendors. The larger and more reputable your references, the better.
When you can use credit and delay payment, it’s easier to manage cash flow and turn goods into revenue.
Insufficient credit: You might not qualify for loans that use mainstream credit scores (like a FICO score), but alternative forms of credit can help you get approved. Perhaps you have not yet established a solid credit history, or your credit scores are too low to qualify for certain programs. In those cases, a credit reference letter may help. For example, some lenders let you borrow for a home purchase with manual underwriting and satisfactory credit references.
How to Get a Reference Letter
- Verify requirements: To use a credit reference letter, ask the new (or future) lender or service provider what they need to see in a letter. A letter that doesn’t meet those requirements won’t do you any good. In some cases, lenders and service providers provide a template that your previous service providers simply fill in. Those forms are ideal for ensuring that you meet all requirements.
- Request the letter: Contact your existing service provider and ask for a reference letter. Provide any templates or instructions you receive from the letter requester, and ask how long to wait for the completed letter. Providing a sample (or fillable template) makes the job easy for the letter writer and may speed up the process.
- Provide authorization: To release details about your account, the letter writer typically needs your permission. In many cases, you can provide that authorization online or by fax. Check with the reference provider, as they may require that you use their forms for the request.
- “No” is a possibility: Lenders, service providers, and suppliers are not required to provide a credit reference on your behalf. As a result, it’s best to ask nicely and make their job easy—they’re doing you a favor. If a service provider doesn’t accommodate your request, there may be other ways to document your payment history (see below).
What to Include
Again, the recipient should specify exactly what to include in a letter. Unless the recipient provides a form, the letter should be printed on the letter writer’s letterhead. The essential elements are typically:
- Length of relationship: How long have you been a customer?
- Payment history: Do you usually pay on time, and are you currently behind on payments? Have there been any late payments during the past 12 months?
Additional details are often helpful, and some recipients specifically ask for the following information.
- Type of service: What products and services do you buy from the reference provider (whether it’s a line of credit, residential electricity, or inventory)?
- Terms of credit: Does your agreement require that you pay within 30 days, for example?
- Address of service: Especially for utilities, the address and type of service are relevant. Multiple addresses are not necessarily a problem (if you moved several times while using the same provider).
- Account numbers: Account numbers make it easier to track and verify details.
- Typical payment amounts: New service providers might want to know if you’re accustomed to making large payments. If so, that signals that cash flow is not a problem.
- Total payment amount: How much have you paid over the life of your relationship? This helps requesters gauge the size of your relationship.
- Late payments: Have you made late payments in the past (typically only delays of more than 30 days matter)? If so, how many times?
Just the Facts
A reference letter typically sticks to the requested information without additional commentary. Don’t expect a letter writer to say you’re a great person or you’ve been a valuable partner (although that could happen).
Businesses are hesitant to say more than they need to. If they say “you can’t go wrong” by extending credit, they risk leading somebody astray — with potential consequences. If you’re writing a credit reference letter for somebody, provide accurate information, and avoid predictions and statements that you can’t back up with facts.
Other Forms of Reassurance
If you can’t get the credit references you need, there may be different ways to demonstrate financial stability or get the approval you need.
Show proof of income: Pay stubs and tax returns (possibly with a letter from your tax preparer) can document your earnings, which may translate into your ability to make payments.
Document assets: If you have significant assets in bank accounts and other accounts, lenders and service providers may be more willing to work with you. It may even be possible (or required) to pledge those assets as collateral.
Use your credit: Your personal credit might help you qualify for business loans and other forms of business credit. With many lenders, you’re even required to make a personal guarantee on business loans. Doing so allows lenders to go after personal assets and report missed payments on your personal credit reports if you fail to repay the loan.
Show your statements: A service provider might not agree to provide a credit reference letter, but that doesn’t mean your payments were useless. Provide historical statements showing on-time payments to a requester. Unfortunately, that requires that the requester manually review everything (which is why they’d prefer a letter from the previous service provider).
Make a deposit: Sometimes a large deposit is your only option. After a period of on-time payments, you may be able to get the deposit returned or credited to your account.
Use a cosigner: A cosigner can help you get approved for a loan or get utilities. That person signs your agreement with you, and their credit scores and income are included in the approval decision. By guaranteeing repayment, the cosigner takes a significant risk—they’re 100 percent responsible for making any payments that you don’t make.
Personal or Character References
A credit reference letter is different from a personal or character reference. Some lenders, particularly in subprime auto loan markets, ask for those references. But a personal reference does not describe your payment history—they simply say you’re responsible and you should get the loan.
Since you get to pick and choose your credit references, you’re likely to use people who you know will speak favorably about you. However, you don’t get to choose the electric company in your area, so that’s typically an unbiased source of information.
Sample Credit Reference Letters
Letters don’t need to be long or particularly well-written. All that matters is that you include the requested facts.
XYZ Company has been a customer since 2008. During that time, the company has made payments in full and on time. We do not have any record of late payments or other outstanding demands.
Jane Doe has been a customer of ours since 2008, purchasing supplies on 30-day payment terms. Since that time, she has made payments totaling $189,537. She has never made a late payment, nor have we ever suspended her account for non-payment.
ABC Company has a line of credit for up to $200,000. The current loan balance on that line is $8,542. As of this writing, all payments have been received on time and in full. We do not show any late payments on the account.
Who Can Provide a Reference?
Your new lender or service provider determines which references are acceptable. You might need to use the same type of reference: An electric company might want a letter from your previous electricity provider. However, you may be able to draw from several sources.
- Utilities like gas, water, sewer, electricity, and trash
- Communication providers such as phone, internet, cable, and satellite
- Lenders (auto loans, home loans, and more)
- Suppliers to your business
- Insurance companies that you pay regular premiums to
- Landlords and leasing companies
- Gyms and other subscription services