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A thin credit file can be a challenge for young adults new to the world of credit. Your credit file represents the number and type of accounts you have opened, as well as any recent activity.
A thin file may not impact your life today, but it could in the future. To build a healthy credit profile, you should open a few different types of cards with various banks and keep them active.
When it comes to thin credit files, you want to fatten them up and not stay lean. The more credit accounts held in good standing you can report to the major credit reporting agencies, the better.
Let’s learn about thin credit files and how you can build up enough credit history to qualify for the credit accounts you need now and in the future.
Let’s jump in!
What is a Thin Credit File?
A thin credit file is a credit history that does not show enough information for creditors to make informed decisions about granting you access to lines of credit and other financial products.
The three major credit bureaus (Experian, Equifax and TransUnion) maintain credit reports for individuals and provide access to a person’s credit report when most lenders pull your credit during a credit check.
When you have a thin credit file, a bank or lender can find it challenging (or even impossible) to assess your creditworthiness. As a result, you might not qualify for the types of credit you need to purchase cars and homes, apply for credit cards, open a future business, or generally receive favorable loan terms.
People with a thin credit file represent a significant portion of the American population. What the Consumer Financial Protection Bureau calls “credit invisibles” amounts to 26 million adults as of 2015.
That means one in every ten American adults have no credit history with one of the three major credit bureaus, hindering access to credit and valuable financial services.
How to Build a Credit History
Thankfully, everyone has to begin somewhere and not having a credit history doesn’t spell doom for you forever. You can take one or more actions to establish credit and put an end to your thin credit file woes.
Many of these steps even allow you to build credit without a credit card—one of the most common ways people look to fill out a credit report and improve credit scores.
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You need not feel like you sit in an impossible situation of needing credit before you can build credit.
In exchange for the risk of extending you a credit limit on a thin credit file, some of these actions let you make a security deposit or borrow from yourself to demonstrate exemplary personal finance habits and demonstrate you’re fairly responsible with credit.
When pursuing any of these avenues, make sure you have no missed payments, don’t make poor decisions with the credit extended, and live within your means to avoid accumulating debt.
If you make all your monthly payments on time and do this consistently, your approval odds for future credit needs will dramatically improve, opening many doors for you down the road.
What Credit Accounts Should I Consider First to Build My Credit Score?
1. Secured Credit Card
Consider a secured credit card as a cousin of an unsecured credit card and an excellent way to learn how to build credit and ending your days of carrying a thin credit file.
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A secured credit card is a type of credit card that requires you to put down an upfront cash deposit, usually equaling the amount of your credit limit.
This cash security deposit helps protect the credit card company from recognizing a loss by issuing you a credit card and failing to receive payments.
A secured card typically works best for individuals with no credit or looking to rebuild bad credit.
The cash deposit establishes collateral the credit card issuer may claim in the event of default or failure to make on-time payments. A secured card often represents the first step someone takes to build credit.
2. Credit Builder Loan
Credit builder loans and credit cards are very different in how you fund and use them, but both are useful for building credit.
A credit builder loan functions as a tool for people who have low or no credit history. They can use them to begin building up their credit scores by establishing a credit history.
If you build up your score enough, you can qualify for better terms on a credit account, car loan, or other forms of financing.
These loans do not require you to have stellar credit to receive approval, just the income to make payments. They work by depositing money into a bank account and borrowing money from it while making repayments.
You’re essentially taking money out of one pocket and putting it in the other. However, you’re doing so with the understanding it builds credit for you.
A credit builder loan should help establish better credit limits on a future credit card account, earn a better interest rate, or receive better overall terms on credit.
Typically offered by credit unions or other smaller financial institutions like a community bank, these credit builder loan payments should get reported to the credit bureaus. In return, this helps you build your credit—though be sure to confirm this!
3. Authorized User Status
Suppose you become an authorized user on someone else’s credit card account. In that case, the credit card issuer will send a card to the primary cardholder with your name.
The credit card company holds the person who signed up to be the primary account holder responsible for paying charges on their account.
If an authorized user makes purchases on the unsecured card but doesn’t pay toward the balance, they are not responsible for repayment.
Parents wanting to help their children build credit often use this strategy.
Before getting an unsecured card and being added as an authorized user, make sure you and the primary account holder have agreed on whether or not to use the card you receive.
Further, you should determine this ahead of time because any charges that you make will be their legal responsibility, even if you agree to pay them.
Credit card issuers report your balance and payments every month to credit bureaus. So, even if you don’t receive a physical card, it affects your credit in the same way.
If you don’t meet the requirements for having credit cards on your own, having an authorized user status on a cardholder’s account might be beneficial to building positive “payment history,” a credit scoring component.
It may cut the time it takes to get a FICO score—one of the most common credit-scoring models—down to less if you don’t already have a card used by credit bureaus to mark your creditworthiness. Further, it might also get credit cards in your hands sooner than later.
4. Alternate Payment History Appearing in Your Credit Report
A person’s credit history relies on traditional forms of debt repayment and credit accounts factoring into their score:
- revolving loans
- installment loans
- student loan payments
However, the major credit bureaus also offer credit products to incorporate more items into your score. Products like Experian Boost account for actions in your overall credit profile like:
- utility payments
- rent payments
- cell phone payments
By paying rent, utility bills, and rent, you also demonstrate your ability to manage other liabilities. Taken together, these added items can create a good credit score worth using when applying for a loan or credit card from a bank or credit union.
If you need a short-term boost to your score, you might consider using Experian Boost to add more credit accounts to your credit profile when being evaluated through a credit check.
5. Co-Signers on Credit Products
If you can’t become an authorized user on a credit card, you might consider becoming a co-signer on one. Generally harder to find, these types of cards carry a legal responsibility for both account owners.
Authorized users don’t need to face the music if they can’t pay their credit card bill, as the primary cardholder remains liable to the lender.
Having a co-signer credit card works similar to carrying a joint brokerage account or bank account—you both have access to the funds. However, they differ because joint accounts list both owners as equals, meaning they share the account title and legal responsibility.
Co-signer cards usually only list the primary cardholder as the account owner. Both face legal responsibility for making payments, and the debt appears on both users’ credit reports.
Who Usually Has a Thin Credit File?
According to the Consumer Financial Protection Bureau’s study, people with a thin credit file tend to be younger, come from a Hispanic or Black background and live in low-income neighborhoods.
These communities have a higher likelihood of having no credit history or not enough current credit history to produce credit scores sufficient to qualify for financing or any loan product.
As a result, thin credit file holders have decreased access to receiving a home loan, car loan, personal loan, or other forms of credit necessary to receive competitive financing terms or credit at all.
Credit reports and credit scores play pivotal roles in the lives of consumers today. Having access to credit can provide for a better life by making major purchases fall within your reach.
This isn’t to say people should overextend themselves simply by having credit made available to them. Instead, it should serve as a valuable tool for leveraging future earning power now to build a better life for yourself.
Fortunately, a thin credit file shouldn’t be an insurmountable obstacle with many of the actions outlined above. Instead, if you work deliberately to establish good credit habits like paying your bills on time every time, this can go a long way toward establishing a good credit history.
Further, learning not to exhaust every line of credit and instead right-sizing your debt draws against your available credit demonstrates your control over credit accounts.
What Can You Do with A Thin Credit File?
Using the steps outlined above, you should make good progress toward fattening up your thin credit file.
You can begin reporting credit activity and ending your thin file by tapping into secured credit cards, credit builder loans from credit unions, and even low-limit unsecured credit cards.
You can also lean on other payments you routinely make to certain types of companies to jumpstart your credit score. You can utilize a credit bureau program that captures on-time payment history on expenses like rent, utility bills or cell phone bills.
Further, suppose you attended college and have student debt. You can have these payments get reported to the credit bureaus by making payments on your student loans while in college or immediately following graduation.
Showing you can handle these expenses over more extended periods will go a long way toward building credit.
How Can I Check My Credit Building Progress?
You have the right to check your credit report from each of the three nationwide credit reporting agencies once every twelve months for free through annualcreditreport.com.
Consider requesting your credit report from each bureau every four months to understand the credit file built on you and whether all of your active account information appears correct.
If something looks amiss, be sure to dispute the errors as this might artificially depress your credit score, causing you to have bad credit instead of simply a thin file.
Many credit card companies offer in-app credit score access if you also apply to credit cards, alerting you to your progress in building your credit file.
These free credit scores can indicate how specific actions affect your score in close to real-time. Though, these scores might not be 100% accurate, as you can only truly get your credit score through lenders making a pull on your credit.
In the credit world, increasing a score takes far longer than eroding one. Much like a person’s reputation, good credit can take a lifetime to build but take only an instant to destroy.
Therefore, to prevent such a thing from happening to you, stay on top of your payments, check your credit report and credit score regularly, and open sensible lines of credit with different lenders to fatten your thin file. Your credit score will thank you.
About the Author and Site
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this personal finance website as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to help younger generations learn how to invest, manage and plan their money with confidence.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.
Riley Adams is a licensed CPA who works at Google as a senior financial analyst. He owns the investing website, Young and the Invested (youngandtheinvested.com/), which teaches younger generations how to invest with confidence.