What Does it Mean to Have a Thin Credit File?
Written by: Kristy Welsh
Last Updated: March 17, 2017
The majority of the articles found in our credit reports section of our website deal with topics such as; how to get your credit reports, how to read and understand your credit reports, and best of all, how to remove negative items found on your credit reports. But, what if you really don't have much information on your credit report? This is known as having a thin credit file. Not sure what that really means or how to get more good information on your credit file? Then this is the article for you!
What is a Thin Credit File?
First of all, a thin credit file means you may be new to the world of credit. Either you are young and just opened up your first credit card account, or you are new to this country, or you might be an older person who hasn't used any credit in a long, long time. If one of these scenarios fits you, you have what is called a thin credit file.
Let's say you prefer not to borrow money or use credit and you pay for everything using cash. That type of financial outlook is fine for only so long. Because, if you are thinking of buying a home or maybe a car in the next year or so, you are going to need more in your credit file than just your name and address. These types of loans are going to require a more substantial credit history and as the saying goes, "You need credit to get credit." A bank may be happy you are debt free, but they would also like to see that you are able to make timely monthly payments on outstanding debts and that you are a responsible borrower. So, here are some tips on how to build up your thin credit file.
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How to Build Up a Thin Credit File
As we already went over, if you are thinking of taking out an auto or home loan, you are going to need a good credit history and a good credit score. In order to generate a credit score, the absolute minimum you need in your credit file is a credit account that has been open for at least 6 months and a credit account that has been reporting to a major credit reporting agency. This means, if you have a secured credit card, you need to make sure your account activity is being reported to TransUnion, Equifax, or Experian. Not all secured cards report to the credit bureaus. On the flip side, if you have an unsecured credit card, chances are the issuing bank does report to the credit bureaus. If you are at all unsure if your credit card company is reporting your credit activity to one or more of the credit report agencies, call the issuing bank to make sure. Bottom line, choosing a credit card that reports to all three bureaus is best for credit building.
Along with credit cards, you can also "thicken" up your credit file by taking out a line of credit or a personal loan that has a short payback period. Make sure you make your monthly payments on time and you pay off this loan prior to applying for your home or car loan. Having some type of installment loan in your credit file goes a long way in boosting your credit score so long as you never have a late payment and you pay it off in the time period allotted. The best place to get an small installment loan is at a local credit union.
Possible Pitfalls When Building Up Your Thin Credit File
Before you start going full-throttle on building up your credit history, watch out for these pitfalls:
- On-time payments account for 35 percent of your credit score, so make sure you make all your monthly payments on time.
- Don't be in a rush to build up your credit. Applying for too many credit accounts all at once can hurt your credit — not help it. Motto here is "slow and steady wins the race."
- Keep a tight rein on your spending. Don't max out your credit cards and keep your balances in check. Your goal is to keep your balance at 35 percent of your credit limit. (10 percent is optimal)
Keep in mind, if you apply for new credit accounts, make sure to keep any old accounts active and open even if you have to make just one purchase a month. This provides the much needed account history, which is a vital part of your credit score.
Monitor the Progress of Building Your Credit File
Hopefully before you even started building up your credit file, you pulled your credit reports from all three bureaus. If not, it is imperative that you do so — this way you can track the progress of your credit building efforts. Some may not agree, but the best way to keep track of your efforts is to enroll in some type of credit monitoring program. There are a lot of different companies that provide this service so we have put together a list of companies we recommend for credit monitoring — many of which also provide you with a credit score.
You don't have to check your credit every day, but you should check it at least every few months. This way, you will know if your credit building efforts are paying off, or if you have to switch gears and try something else. If you follow our suggestions and monitor the progress of your credit file, in a year or more, you will be able to apply for a loan for a house or car. Your once thin credit file will be robust with a great credit history and an even better credit score. This is how you can put yourself in the driver's seat of an awesome car or sitting in the house of your dreams knowing you got the best loan available.