It can seem like a vicious cycle. You need a good credit score to get credit, but you can’t get a good credit score without using credit. If you’re stuck in that loop, you probably have a thin credit file: your credit record either has too little in it to generate a score, or it doesn’t have enough to convince potential creditors that you’re an acceptable risk.
If you have a thin credit file, you’re not alone. 26 million American adults have no credit score, and another 19 million have too little information on file to generate a credit score. Many others have a score that is based on a small amount of information. The Consumer Financial Protection Bureau (CFPB) reports that 1 in 10 adults in the US will experience “credit invisibility” in their lifetime.
Let’s take a closer look at what a thin credit file is, how it affects you, and what you can do about it.
What is Your Credit File?
Your credit file is much more than your credit score. It’s your entire borrowing history: which institutions have loaned you money and your track record in paying that back. It shows late payments, defaults, bankruptcies, and other credit problems.
Your credit file is composed of the credit reports kept by the three major credit bureaus: Experian, Equifax, and TransUnion. All of the information in those files is reported by companies you have done business with. Usually, those companies are lenders and credit card issuers.
☝️ Most of the companies that bill you day in and day out don’t report, so paying your rent and utility bills on time won’t build up your credit file. That said, failing to pay your bills can hurt your credit score. Find out more in our guide on how utility bills affect your credit score.
What is a Thin Credit File?
If you haven’t used loans or credit cards, you’ll have a thin credit file or no credit file at all. With a thin credit file, lenders don’t know what or who they are looking at. That can become a big problem, especially if you plan to finance major purchases. If you have a thin credit file and you see moves like buying a car or a home in your future, the time to start building that credit file is now. It will take time, but you can do it.
⚠️ A thin credit file can make it hard to get credit. If you don’t have enough information on file to generate a score, potential creditors will have nothing to evaluate. Even if you’re managing your money well, there won’t be any evidence of that.
⚠️ Even if you have enough information on file to generate a score, a thin credit file can leave you subject to rapid swings in your credit score.
The Thinner the File, the Bigger the Drama
With little credit for credit monitoring companies to observe, every credit-related move you make will have a dramatic impact on your file. With a thin credit file, everything you do – positive or negative – is magnified. You need to be extra careful about your credit activity.
If you have a deep file with numerous accounts and entries, the impact of a single missed payment will be small. Why? Because there are so many other items to balance out a small misstep.
🤔 Think of it as dilution. A drop of red dye can color a shot glass of water but be barely visible in a gallon jug. The impact of a negative entry on a credit file works the same way. The thinner the file, the more visible the impact.
Who Has a Thin Credit File?
Anyone can have a thin credit file, but there are specific groups that are most likely to face this obstacle.
- Young people entering the world of adult financial responsibility.
- Recent immigrants.
- People who have avoided credit and handled finance with cash and debit.
- People who stopped using credit for long enough that their credit data is too old to use.
- Newly single and had little to no credit in your own name.
If you’re in one of these groups, or if you have a thin credit file for any reason, you probably know all too well what a thin credit file can do. Your main concern is probably getting out of that trap. Let’s look at some ways to do that.
Fattening Up That Credit File
There are a number of ways to start building credit for the first time, or after a period of time when you have not been using credit. Here are a few ideas to get you started down the road to getting a credit history for lenders to work with.
1. Become an Authorized User
If you’ve never had a credit card, you could start by becoming an authorized user on someone else’s card. The primary cardholder still has full responsibility for the balance, payments, and making any changes. But the credit report on the account will go to both the primary cardholder and authorized user. Make sure that you have a good relationship with the primary cardholder and that the primary cardholder has a good credit track record, especially with this card. Also, check to be sure that the credit card issuer includes authorized users in their credit reports.
2. Retail Store Cards
Another way to expand your credit file is to apply for a retail card, like for Kohls, Amazon, or wherever you shop. These cards are usually easy to get: you’ve probably been offered a card after shopping in-store or online recently.
Store cards offer lower limits than a Mastercard, Visa, or Discover card, so you can start with small purchases, pay them back, and build credit.
3. Secured Credit Cards
Secured credit cards are an effective and accessible way to build credit. You put down a deposit, and the amount of the deposit becomes your credit limit. The lender takes only minimal risk, so they’re willing to issue a card even if you have a thin credit file.
💡 Many issuers will raise your credit limit or even move your card to non-secured status if you establish a good payment record.
4. Credit Builder Loans
Many local bank and credit unions offer credit builder loans. The money you borrow is placed in an interest-bearing account at the lending institution. You make the payments, and when the loan is paid you get the lump sum.
Again, there’s little risk to the lender, so approval is easy, and you get an installment loan on your record. You also walk away with a lump sum of money at the end of the deal, which is a great incentive to make the payments.
💡 If you’re considering buying a car, for example, you can save for a down payment and build your credit at the same time!
5. Get Payments Counted
Utility and rent payments are generally not counted toward your credit score. Credit reporting bureaus have recognized this gap, and are introducing products to close it. Look into Experian BOOST™, Experian RentBureau, and TransUnion’s eCredable Lift.
Each of these services will only affect one of your credit reports, but that still means something, and when your credit file is thin every little bit helps.
6. Make Those Payments
Getting new credit accounts will thicken your credit file, but you need to make sure you’re filling that file with positive records. A secured credit card or a credit builder loan is a great way to build credit, but you need to be sure that you’re making every payment on time, or you’ll be doing yourself more harm than good.
Making every payment on time is a huge part of building your credit file, so you’ll want to be sure to keep your commitments well within your capacity.
⚠️ It’s always good to avoid biting off more than you can chew, but it’s especially important when you have a thin credit file. A credit card can make spending tempting, so be sure to keep an eye on that temptation!
7. Mind your Credit Utilization Ratio
As you build your credit, understand that credit reporting companies will also be looking at your credit utilization ratio. The ideal is to use under 30% of your available credit limit on your credit cards. Less is even better: the average credit utilization ratio of FICO’s “high credit achievers” is only 7%.
Credit utilization is especially important if you have a thin credit file because most of your credit products will have relatively low limits. If your limit is low it’s easy to push credit utilization up with a few transactions.
➗ Use our debt utilization calculator and keep coming back to it to stay on track with this important credit metric.
💡 If you have a low limit on a card consider putting a few small recurring expenses that you’d pay anyway, like a Netflix subscription or your internet bill, on the card. Then you can set up an automatic payment from your checking account and just put the card away.
Build Your Credit File Slowly
Building up a thin credit file is a marathon, not a sprint. It’s important to understand that you don’t want to rush out and take all these steps at once. It’s well worth the time and effort. Remember, you’re not just building up you’re credit file, you’re learning good financial habits that will serve you for the rest of your life.
A thin credit file is not something to get overly stressed about. It doesn’t mean you’ve been financially irresponsible, it just means you haven’t built up a paper trail that proves your responsibility. Understanding what a thin credit file is and having some tools in hand to build your file over time will help you reach your financial goals and keep your credit rating solid.