According to the Consumer Financial Protection Bureau, something like 26 million adults in the United States had little to no credit in 2010. The CFPB calls them “credit invisible.” Another 19 million had credit files thin enough that they couldn’t be scored. While a thin credit file might sound like an asset—no news is good news, right?—this isn’t actually the case.
Luckily, there are a few things you can do to improve your thin credit file. Before we delve into those tips, let’s start with the basics.
What Is a Thin Credit File?
A thin credit file is one that has very little information in it. Basically, you’d have to have little to no credit history to have a thin credit file. While credit files are digital today, imagine if they were printed on paper. If you only had one loan to your name in the past 10 years or so, you’d have a single piece of paper in your credit file. It would literally be thin.
Typically, a file is considered thin if you have less than four accounts or less than 6 months of credit history in it. You can have a thin credit file for a number of reasons, including:
- You have forgone credit use for any reason and paid cash for most things for sometime
- You share or shared your finances with a spouse and most of the credit is or was in your spouse’s name
- You’re young and are just establishing your credit as an adult
Why Is Having a Thin File Not an Asset?
When creditors consider whether they’re going to lend you money, they’re making a risky decision. Specifically, they need to determine whether you’re likely to manage this credit responsibly and pay them back as agreed. Your credit score and file is one of the best indicators of that.
But if you have a thin credit file, creditors don’t have enough credit history to base this decision on. In some cases, the credit scoring model doesn’t have enough information to even provide you with a score. And when they do, if you don’t have multiple credit types and a decent history, the score might be low.
That’s because your score is mostly made up of five elements. They are:
- Payment history, which accounts for 35% of your score
- Credit utilization, which accounts for 30% of your score
- Credit mix, which accounts for 15% of your score
- Age of credit, which accounts for 10% of your score
- Inquiries, which accounts for 10% of your score
If you have a thin file, chances are you don’t have enough payment history, credit mix and/or age of credit for a strong score. And if your file is thin and it’s only made up of a single credit card with a high balance, your credit utilization could be dragging your score down even more.
How Do You Build Your Credit History?
Whether you’re just starting to build your credit history as a young adult or you’re looking for ways to help improve your credit without a credit card, you have options. Here are just a few ways you can help thicken your credit file and boost your creditworthiness:
1. Get a Secured Credit Card
People with thin credit files often face a dilemma when it comes to building credit. It’s hard to get someone to give you credit if you don’t already have it. Secure credit cards could help.
Secured credit cards are designed for people with no, little or bad credit. You have to put up a deposit to secure your line of credit at first. That makes it less risky for the creditor, which means they’re more willing to take a chance on people with thin credit.
Deposits typically start around $200. Secure credit cards can be tools to help you build credit by making timely payments or by including a revolving credit account in your mix. Just make sure you choose a card provider that reports to all three credit bureaus.
2. Take Out a Credit-Builder Loan
Credit builder loans work like secured credit cards. Some require you to make a deposit to secure the loan. Once you pay the loan back in full, you get the deposit back.
Others are simply personal loans for small amounts. You may not get the best interest rate on these loans, but if you make timely payments on them as agreed, they can help you positively impact your credit score and build a more robust credit file. If you only have a credit card, this can also be a way to increase your credit mix.
3. Get Someone to Cosign a Loan
If you can’t get credit or you need credit for something like a vehicle, you can ask someone who has good credit to cosign a loan for you. This can help you get a lower interest rate or better terms and build your credit. Just make sure to read the fine print and ensure your timely payments get reported to your credit history and not just your cosigners.
4. Make Sure Rent and Utility Payments Count
You might also be able to add to your credit history with payments you’re already making. While rent and utility bill payments don’t typically get reported to credit bureaus, you can use services such as our newest product ExtraCredit to ensure they do. Those timely payments help indicate that you are someone who makes good on their obligations, which can help encourage creditors to lend to you in the future.
Find Out Where You Are and Start Building Credit
The first step to dealing with a thin credit file? Knowing where your credit stands. Check out our free credit report card to find out what shape you’re credit score’s in. You can also see how your credit history does in those five key factors that play into your score.