Your credit file contains information about your personal and financial history, including your previous addresses and Social Security number (SSN), when you borrowed money from which lenders, and whether you made debt payments on time.
If you’re new to using credit or don’t use it frequently, you might have what’s considered a “thin” credit file. That means you don’t have much information in your credit file, so it may be difficult for credit bureaus to calculate your credit score.
Let’s dive into how thin credit files work and how you can build a larger credit history.
Who is likely to have a thin credit file?
There are several groups of people who are more likely to have a thin credit file, including:
- Students and young adults: Since you need to be 18 years old to apply for many types of credit, including credit cards, you may have a thin credit file until you begin consistently using credit, whether that’s your first credit card, a car loan or a mortgage.
- People who favor using debit cards or cash: Debit cards take money directly from your checking account instead of using a line of credit. Typically, debit card payments aren’t reported to the credit bureaus. So, if you prefer using debit to manage your finances, you might have a thin credit file. The same can apply if you prefer to pay in cash for most purchases.
- Recent immigrants: Recent immigrant who haven’t yet established credit history in the U.S. may need to use a secured credit card to start establishing credit
- People who are debt-avoidant: Everyone’s risk tolerance for debt is different. If you avoid debt at all costs, you might have a thin credit file despite your excellent money management skills and debt-free lifestyle.
Consequences of having a thin credit file
While having a thin credit file isn’t necessarily a bad thing in all circumstances, it can make it more challenging to borrow money when necessary. There are several key consequences of thin credit, including:
- Difficulty accessing credit: When lenders don’t have sufficient information to understand your creditworthiness, they may be hesitant to lend you money. This can make it difficult to get a loan for a car, rent an apartment or get a credit card.
- Higher interest rates when borrowing: If a lender does decide to take a chance on a borrower with a thin credit file, they may impose higher interest rates for the loan or line of credit
- Lower credit limits if approved: Lenders may limit their risk when lending to a borrower with a thin credit file by extending a lower credit limit. Keep in mind that as a borrower builds their credit file and shows a pattern of responsible borrowing, they can request a credit limit increase.
Strategies to build your credit file
Fortunately for borrowers with a thin credit file, there are steps that can help you build credit over time.
Check your credit report and dispute errors
The first step to help build your credit file is to check your current credit report to ensure everything is correct. While there may not be a lot of information in your file, correcting even minor errors can help pave the way for establishing a credit score that’s as accurate as possible.
Consider a secured credit card
A secured credit card can be a way to start building credit. If you’re approved, you’ll provide a deposit usually equal to the credit limit. Then, you can spend using your card.
Payments on your secured credit card are reported to credit bureaus, which can help build credit history. However, if you fail to make timely payments, it can damage your credit, and the lender can use your original deposit to cover your balance.
See if you can become an authorized user
If someone in your life, like a parent or partner, has a great credit history, you may be able to leverage their financial savvy to help build your credit history. Becoming an authorized user on a credit card means you’ll have permission to use the credit card, and, if the card issuer reports authorized users to the credit bureaus, your credit file may benefit from the primary user’s good credit habits.
Look into credit-builder loans
With most installment loans, you’ll receive a lump sum of money upfront and then pay back the balance due over time. Credit-builder loans are an alternative form of installment loan – you pay the loan balance over time and then receive the lump sum at the end (typically plus any interest earned in a savings account or certificate of deposit). Credit-builder loans allow you to build credit through timely payments reported to credit bureaus.
See if you can report rent or utilities to credit bureaus
You may be able to use a third-party service to report rent or utility payments to credit bureaus. This is a way to help build up a credit file. These services can sometimes have an associated fee, so you’ll want to understand all the details before signing up.
Tips for responsible credit use
Building a credit file can take years of responsible financial management. However, there are a few good habits that can help.
- Make credit payments on time and in full: Payment history is the biggest factor in determining your credit score. So, making payments on all loans and lines of credit on time is beneficial. Consider automating payments or setting notifications to help ensure you don’t miss a due date.
- Monitor how much credit you’re using: Your credit utilization, or the percentage of available credit you’re using, impacts your credit score. A higher credit utilization signals that you may be struggling to make payments.
- Review your credit report annually: You can get access to a free credit report from each credit bureau once every 12 months. Check your reports to ensure there are no errors.
- Develop good money habits: Habits like only borrowing what you need and paying off credit cards each month can help you use credit responsibly and develop healthy financial management skills.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
