by Donna Burt

Created on: October 26, 2008

The term credit letter applies to different objectives depending on the status of the writer. With this in mind, there are three major types of credit letters. Those provided to a consumer, those from a consumer to a credit reporting agency and those from a consumer to a creditor (also known as credit explanation letters). While the first two formats should be precise and detailed, addressing facts only (i.e. copy of credit report, payment history, etc), the latter is used to provide an explanation of circumstances when applying for credit.

A consumer may be asked to write a "credit letter" when applying for a loan in which their credit report reflects negative or derogatory information. What the creditor is actually asking for is an explanation as to what happened. This letter is often times the difference between obtaining credit or not. Applying for a home mortgage is a primary creditor that might ask for this letter.

When beginning the letter it is important to gather any documentation that might support the explanation. This information will be reviewed as part of the letter itself. There are four major categories to a sound letter of explanation. Keeping this in mind, a letter should be brief and sincere. While the person making the credit decision is interested in what happened, they are also experienced in making risk based decisions. Over a period of time, being sincere and to the point is always the better choice.

Factors to consider when writing a letter of explanation should consist of cause, result, action and resolution. Another thing to consider when writing a credit letter is the fact the creditor is being asked to loan money. Regardless of the amount or the purpose, those granting a loan want to make sure they are making a sound decision.

While most consumers are able to relate to a specific situation in their life that resulted in possible credit issues, including bankruptcy and foreclosure, most creditors will review the credit letter as to the amount of control a borrower had on the event. In example, if a consumer has a foreclosure on their credit report, what did they do to try to prevent it from happening? The letter would address the factors leading up to the foreclosure and what a consumer has since done from preventing it again. The letter would include copies of correspondence with the lender explaining the situation along with documentation they tried to sale the home prior to the foreclosure.

With the current economic conditions, creditors are allowing less risk based loans. Based on this, if a consumer is turned down due to their credit history and there are special circumstances, they should send the company a "credit letter" with documentation to support their explanation and reconsideration. The difference might easily be a reversal of the initial decision. An important fact to consider, letters of explanation with no supporting documentation stand a minimal chance of being reversed. In the world of credit, intent holds little reason for approvability.

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