Credit references are characterized by variety. Myriad types exist and the impact of many is difficult to quantify. We sought perspectives from a panel of lending experts from both the consumer and corporate sides of the aisle, including Sharon Lassar, John J. Gilbert Endowed Professor and director of the School of Accountancy at the University of Denver’s Daniels College of Business.
Q: What types of credit references are most important to lenders?
SL: Credit references that show a borrower’s ability to make timely payments are important. Borrowers that make payments without a creditor having to send late notices or pursue other costly collection activities result in profits to the lender.
Q: When, if ever, do character references help prospective borrowers?
SL: Character references can help prospective borrowers who do not yet have a credit history. When I bought my first car, the local savings and loan that lent me the money asked for a reference from my employer. I did not have a borrowing/repayment history and the lender wanted some indication that I was reliable. Reliability in making payments is key. In today’s environment, it is easy to establish reliability.
For example, a worker who has a standard commute can predict the amount of money she will spend on gasoline each month, open a credit card with the fuel company, and set up automatic payments from her bank so that she never misses a payment. When fuel prices and driving habits hold steady, the automatic payment will closely approximate the balance, even if the driver forgets to check her bill from time to time. One could do the same thing with a bank credit card like a general-purpose Visa tied to one’s checking account, except that consumers might find it too tempting to use a bank credit card to make impulse purchases. Psychologically, it might be easier to only use a credit card to purchase gasoline if the credit card is emblazoned with the name of your regular gas station.
Q: Are credit references (excluding consumer credit reports) more important to consumer or corporate lending?
SL: Credit references are important for both consumer and corporate lending. Some new corporations are able to borrow money only with personal guarantees made by the corporation’s owners. Therefore, in order to start a business where credit is needed, it may be important to first establish good personal borrowing practices.