The size of your credit file is important when it comes to applying for any type of loan. A credit file shows you have a proven track record of repayment and can be trusted with a line of credit. If you’ve recently been told you have a thin credit file, you can take steps to build it. Let’s explore what a thin credit file is and how to improve it.
Definition of Thin Credit File
A thin credit file is one with a limited number of credit accounts. For instance, if the only line of credit you’ve ever had is one car loan, that would be considered a thin credit file. Most lenders consider a portfolio of four or less accounts to be ‘thin.’
If you have no credit history at all, you are considered ‘credit invisible.’ This means that you have nothing positive or negative on your credit report. Invisible credit is still considered a thin credit file.
Common Reasons for Having a Thin Credit File
Young adults typically have thin credit files because they have not yet had time to build credit. Some parents have begun adding their teenagers as authorized users to their credit accounts to help build their children’s credit files before they turn 18. This gives teens an opportunity to start adulthood with a positive credit score, especially when coupled with proper financial education. As many as 17% of preteens in America are authorized users on their parents’ credit card accounts.
Being young isn’t the only reason one may have a thin credit file. If you’ve had little need or desire for a line of credit, you may not have any accounts on your credit history. If most of your credit is from several years ago, you may have a thin credit file now. Accounts fall off your credit reports after seven years. That means someone with a formerly ‘fat’ credit file could have a thin file after years of inactivity.
MORE FOR YOU
Immigrants may also have a thin credit file when coming to the United States, even if their credit was strong in their home country. This is because the U.S. measures credit differently than other countries, and the data is not usually transferable. American Express AXP recently collaborated with Nova Credit to alleviate this issue. American Express can access credit reports from select countries and create a U.S.-equivalent credit score. This information is used to approve credit card applications from international applicants.
The Downside of Having a Thin Credit File
Having a thin credit file may make it difficult to receive credit in the future. A home loan, credit card, personal loan, or other form of borrowing may be denied due to a lack of credit history. You may not need a line of credit now, but what about five years from now? It can take years to build a solid credit portfolio. If you take those steps now, you may have credit available when you need it most.
Is Thin Credit Bad Credit?
It’s important to distinguish between thin credit and bad credit. Bad credit refers to a delinquency in payments or other negative mark on a person’s credit report. Thin credit is a lack of credit accounts, whether the payments made were on-time or otherwise. A person can have good credit or bad credit with a thin credit file. A person with bad credit may have a robust credit file. The two terms do not always go hand-in-hand.
How to Build Your Credit Portfolio
Want to make your thin credit file a little fatter? Here are some steps that may help:
- Start with a small line of credit. This could be something like a secured credit card, an entry-level credit card, a student credit card or a small personal loan. Approximately 38% of consumers use credit cards to become credit visible. Make sure the line of credit will report to all three credit bureaus, and make your payments on time each month.
- If you already have a credit card, use it! Put all your daily purchases on the credit card, and pay off the entire balance at the end of the month. This will show consistent credit history, and could lead to a larger credit limit in the future.
- Diversify your credit portfolio. If you have a car loan and nothing else, apply for a low interest credit card. The goal is to make your credit history diverse so lenders can see your true credit worthiness.
- Avoid applying for everything at once. You want a diverse credit file, but you don’t want to look desperate. Once you establish a new line of credit, wait about six months before applying for a new one. Building credit takes time.
- Get help from someone with good credit. You could do this by becoming an authorized user on their credit account or by having them co-sign on a line of credit with you. Keep in mind that missing a payment or racking up an unexpected bill will negatively impact both their credit and yours. Only agree to this if you can commit to the payments.
- Check your credit reports for existing accounts. If you have old debts or anything in collections, pay them off to revitalize your credit. This creates a solid foundation for a portfolio of positive accounts.