What Is a Thin Credit File?
Having poor credit can make it difficult to qualify for loans or qualify for favorable interest rates. But having a thin credit file can present an even bigger challenge when you need to borrow money.
According to Equifax, 27% of Americans have a thin credit file, while another 1.7% are unscoreable. If you’re one of them, it’s important to know what having a thin credit file means and how it can affect your ability to get loans and lines of credit.
What Is a Thin Credit File?
Your credit file or credit report is a collection of information about your financial history.
- A typical credit file includes details such as:
- The number of open credit accounts you have
- The number of credit accounts you have that are closed
- Balances for each of your open credit lines
- Available credit limits for open credit lines
- Minimum monthly payments due
Having a thin credit file means that you don’t have very many credit accounts in your name. This usually means four or fewer credit accounts. You could also have a thin credit file if you haven’t been using credit that long, say for six months or less. Having zero credit accounts in your name would result in having no credit file or being deemed a credit invisible.
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Why Is Having a Thin Credit File a Problem?
Your credit file matters for one very important reason: it’s what’s used to calculate your credit scores.
Credit scores represent how responsible you are when it comes to managing your finances and debt, as measured on a scale of 300 to 850 for FICO scores. The higher your credit score, the better your odds of being approved for new loans and lines of credit and securing the best interest rates.
FICO credit scores are based on five specific pieces of information from your credit file:
- Payment history (35% of your score)
- Credit utilization (30% of your score)
- Credit age (15% of your score)
- Types of credit used (10% of your score)
- Inquiries for new credit (10% of your score)
When you have a thin credit file or no credit history at all, it’s much more difficult to generate a credit score. Without a credit score and/or a credit file, lenders have a harder time determining how creditworthy you are. That could cause you to be denied for credit or be approved but pay higher interest rates if you’re perceived as being a higher risk borrower.
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Who’s Likely to Have a Thin Credit File?
Whether you have a thick credit file or a thin one can depend on several things, including your age and your financial habits. But generally, thin credit files are more often associated with people who:
- Are young and just beginning to use credit
- Prefer to pay cash for things rather than borrow
- Are immigrants who have yet to establish credit in the U.S.
- Only open credit accounts when absolutely necessary
- Are/were married but lack credit accounts in their own name
You could also have a thin credit file if you use alternative sources of financing that aren’t reported to the credit bureaus, such as payday loans or no credit check installment loans.
Keep in mind that a thin credit file may not be a true picture of how responsible you are when paying bills. For instance, if you pay your rent on time each month, that’s proof of your ability to keep up with your financial obligations. New credit scoring models like FICO 9 make more of an effort to include alternative data such as rent payments to help people with thin credit.
How to Improve a Thin Credit File
If you have a thin credit file, you don’t have to be stuck with it. There are things you can do to fatten up a thin credit file and build positive credit history over time.
Some of the most helpful ways to do that include:
- Becoming an authorized user. Having authorized user status on someone else’s credit card account can give your credit file a boost. Activity for that account can be transplanted onto your credit history and help you build credit, regardless of whether you actually use the card or not.
- Apply for a secured credit card. Secured credit cards can be opened with thin or poor credit history. These cards are secured by a cash deposit you make up front, which typically doubles as your credit limit. You can build credit history as you make purchases and pay them back.
- Consider a small personal loan. Taking out a small personal loan of a few hundred dollars is another way to establish credit. The key is making sure you make your loan payments on time, since that has the most impact on your credit score.
As you work on improving a thin credit file, remember to check your progress regularly. Reviewing your credit reports quarterly or biannually can help see how far you’ve come in building credit and spot any errors or inaccuracies that could be hurting your credit score.
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Not Borrowing an Appropriate Amount
It’s tempting to take the money and run, so to speak, and worry about repayment later. Do your best to avoid that temptation and borrow just the amount you need. This makes it easier for you to repay that loan in the long run. Taking more than you need, especially when your lender offers you a high loan amount, can be a bad idea indeed.
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Why is it so bad? Just because your lender is willing to lend you a specific amount doesn’t mean that you need to accept. You could easily end up biting off more than you could chew if you go too big, especially because the metrics that lenders use to determine if you’ll be able to repay that loan don’t take everything into account.
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Rebecca Lake is a freelance writer specializing in personal finance,
credit and debt. She’s a contributor to U.S. News and World Report,
Forbes Advisor and The Balance and her work has appeared online at CreditCards.com,
Money-Rates.com and dozens of other top publications.