How to Check a Credit Reference

If you extend credit to an individual or business entity, you must check the credit history of the person or entity that you are lending to in order to reasonably insure yourself that you will be repaid. Furthermore, if you hire a person to work for you or rent property from you, you must perform a credit check in order to determine the reliability and integrity of the party via his credit history. Credit history can be obtained through credit bureaus in accordance with the provisions of the Federal Credit Reporting Act, or through credit references provided by the applicant.

Instructions

How to Check Credit References

1




Credit reports

Ask your applicant to provide credit references that can be checked via official credit reports. Obtain a credit report from the credit bureaus of choice, as long as you have a permissible reason for requesting the report, such as a credit, lease or employment application. Insure that any employment credit requests are authorized in writing by the prospective employee, and that the credit report obtained is of the credit header variety that does not list names of each creditor. Notify any applicant turned down due to negative information contained within the credit report via an adverse action report.

2




Credit references

Prepare a detailed credit reference form for your prospective business contact. Insure that the form does not only include direct references provided by the applicant. It should include names, addresses, business volumes, payment records, addresses, telephone numbers, fax numbers and locations of the four largest suppliers and vendors of the applicant that can be verified over the prior period of three to five years. Obtain bank references from your prospective client that reflect continuity, stability and loan activity with business relationships, including high and low credit balances during the past 12 months.

3




Other credit references

Review the financial statement of your credit customer in order to determine his financial well being. Check his current ratio, which is the relationship of his current short-term assets to current short-term liabilities, which should be as close to 2:1 as possible in order to rate the potential client as a good credit risk. Review the personal credit report and references for foreign-based customers through foreign reputable credit agencies. Review the personal credit reports and references for the owners of new companies that do not yet have meaningful track records.