Thin Credit File Explained
A thin credit file is a negative mark on your credit history, meaning that you don’t have a lot of information recorded. It also might mean that you haven’t been in a position to make large purchases in the past, or it could simply be because you have never applied for credit before. Whatever the reason behind it is, in this article, we will give you what you need to know about thin credit files and how they affect your ability to get loans and other services with ease.
If you have ever heard of a thin credit file, it’s probably because you are trying to get a loan and have you have been denied. A thin credit file means that the information on your credit report history is incomplete or inaccurate, hence making it harder for you to borrow money.
This can be an issue if you are trying to buy something big like a house or car, but even if you don’t plan on using the loan for something this expensive, having bad credit could affect other parts of your life.
Another way how you can have a thin credit file is by not having recent credit score history. Lenders can view you as a risky borrower if you don’t have proof of your credit history. Because of that, getting approved for loans can be difficult, and it also means you could get denied.
On top of that, in case lenders do approve you for a loan, know that you will have a much higher interest rate in comparison to people who have a better credit history. Also, this way you could end up in debt and with a thin credit file, you can also struggle to get approved to rent an apartment.
Since there are many complications in regard to having a thin credit file, we suggest that you start making some improvements to it for the future. Doing this can help you a lot down the road when it comes to choosing a loan or getting better terms on it.
What Is a Thin Credit File?
Now that we have covered some basics, let’s see what is a thin credit file. As mentioned above, a thin credit file means that you have less than five credit accounts on your credit report. With that said, there is no need to worry, since 62 million Americans have a thin credit file and there are ways how to fix it.
It’s very important to know that most credit score models need at least one or two active credit accounts on a credit report to generate the score. On top of that, they usually require payment activity for three to six months.
Also, some lenders and service providers can require a larger down payment or offer you credit at a higher interest rate. This is a result of them not being able to access your credit score history.
We will give you some cases that can cause a thin credit file:
- Having a small amount of credit history
- Having only one or two active accounts
In case you are looking to take out any type of loan, if your credit file is thin, we do recommend that you start working on getting it better. Not only will it help you get approved for the loan easier, but it will also give you the possibility to get a better deal.
What Happens If You Have a Thin Credit File?
In case you have a thin credit file, it means that the information in your credit report is not as detailed or thorough. Before you apply for loans or credit cards, lenders will check your credit score to determine whether or not they want to give you money.
When lenders see that you have a less-than-perfect credit history, they may choose not to lend any money at all. This can be problematic if you need the funds. If banks refuse to let people with thin files borrow money, those people will be forced to find other ways of financing their purchases and investments.
This could cost them much more than what they could have paid by going through traditional channels.
If this sounds like something that might happen in your future, it’s important for you to understand how lenders make decisions about who gets loans and other types of financial assistance based on their past experiences with applicants like yourself.
Because there are many factors influencing how lenders decide who gets approved for loans (and how much), it’s best to start building your credit score as fast as possible. You never know when you will need to take out a loan or even rent a new apartment.
Who Is Most Likely to Have a Thin Credit File?
If you are new to credit, haven’t had any major problems with your accounts or inquiries, and have had fewer applications than the average person (as measured by your credit score), that would indicate that your credit file could be “thin”
Another way you may also be considered “thin” is if you have been in the game for a while but still don’t have many inquiries on your report and no major negative information, such as collections or charge-offs (when creditors write off uncollectible debts).
On top of that, there are some more ways how your credit may be counted as thin:
- If you are young. Young people tend to be “thin” since they are new to the world of credit cards
- New to the US. If you have just moved to the US, you will need to start building your credit score again, since your old ones are not transferred
- Didn’t use your credit card in a long time. In case you didn’t use your card in a long time, your credit can be counted as a thin file
- Have few credit accounts. If you don’t have that many accounts, you could also be counted as thin
- Usually pay with cash. If you prefer to pay with cash, it can cause your credit file to become thin
How Does a Thin Credit File Affect You?
A thin credit file can affect you in multiple ways. For example, it can be hard to get a loan or rent an apartment. And if you want to buy a car or even job search, employers and others may not be able to verify your information without giving them access to your credit reports.
Additionally, insurance companies may charge higher premiums for people with thin credit files because there is a lack of information about them, which can potentially lead them to believe that risk is higher than it actually is.
On top of that, if lenders do approve you for a loan, your interest rate is going to be higher and you will need to pay more money back, which can lead you into debt.
Here are some things thin file of credit can affect:
- Ability to get approved for a loan, mortgage, or apartment
- Possibility to get a credit card
- Open a utility or cellphone account
- Ability to get good rates for auto insurance
- Possibility to get qualified for in-store purchases or financing
Now that you have an insight into what a thin credit file can affect, in case you do have a thin file, we do recommend you start working on fixing it since it will make it easier for you down the line.
If you need help with doing so, you can always contact an expert to help you do it. It’s best to start doing it before you decide to get a certain loan.
How to Improve a Thin Credit File?
In case your thin credit file is keeping you from getting access to loans or other services, there are a few things that you can do to improve it. Here are some steps on how to build and fix a thin credit file:
- Take out a credit card or two. If your thin credit file is due to not having any accounts open, then opening up an account will help. This includes both secured and unsecured cards. They both offer the opportunity to build up your credit score quickly through regular payments on time and responsible use of the card.
- Make sure that all of the bills in your name are paid on time every month. This will help ensure that all creditors have accurate information about their accounts being paid regularly, which will ultimately affect their decision about whether or not they qualify for loans in the future.
- Use these cards for small purchases when necessary. If you do this and pay off everything each month so there is no balance left over from previous months charges by the end of each cycle, you can improve your VantageScore. VantageScore that scores below 600 tend to be considered risky.
- Find a cosigner. Another great way to boost your credit file is by having a co-signer. Your cosigner will vouch for you and make it easier for you to get the desired loan. In case you get approved with a cosigner, the lender will take the cosigner’s information, such as their income and their credit report.
- Become an authorized user of a credit card. Becoming on someone else’s credit card an authorized user can have great benefits for you. When someone gets a card, you can become their authorized user. They will still be in charge of the card but you can still make purchases with it.
By following all these steps, you are guaranteed to improve your thin credit file fast. Another thing you can do is consult with a financial advisor who can help you manage it in the future also.
On top of that, these are just a few of the steps you can follow, but in case you think you need more, you can always do a bit of research with your lender to see what else you can do.
Having a thin credit file is not a good thing. You need to do something about it or risk having your financial life negatively impacted for years to come.
Once you have done that, take steps toward improving your credit score by paying off debts on time and getting a secured credit card if needed. It’s important that you remain diligent in managing your finances so they don’t become too thin.
So, in conclusion, a thin credit file is just one of many factors that lenders use to decide whether or not they want to lend you money. Be careful when it comes to this and if you already have a thin file, we gave you steps on how you can fix it.