Best Ways to Build Credit If You Have a Thin Credit File
One of the biggest ironies of credit-building is that you need credit to build credit.
According to a report released by the Consumer Financial Protection Bureau (CFPB), more than 26 million Americans are “credit invisible” and 19 million more are “unscorable.”
“The results suggest that the incidence of being credit invisible is very high for 18-19 year olds, but then falls sharply. The share holds relatively steady after age 25, until it begins to increase with age after 60.”
What does “Thin File” mean?
Being thin is not always a good thing. When there is not enough information reported to TransUnion, Equifax, and Experian to generate a credit score, credit bureaus report that you have a “thin file.”
Consumers with thin files can be placed into two basic groups. The first group is consumers who do not have a credit report (no credit card, insurance premiums, loans,etc.). The second group includes consumers who do not have enough credit history yet to generate a credit report or have not reported information recently.
Tips to Build Credit if You Have a “Thin File”
While it may be difficult to build credit with a thin file, it is not impossible. Here are a few tips to get started.
Credit Building Loans
Credit builder loans allow consumers to build credit at a low risk to themselves and the bank or credit union offering the loan.
These loans, which are usually for small amounts (up to $1,000), can work in a few different ways. Most credit building loans require borrowers to make timely payments on the loan over a period of time (usually less than a year). After the loan is paid off in full, the borrower can access the money.
In other cases, the borrower may give money to the lender up front, who puts the money in an interest-bearing account. The lender then provides the borrower a line of credit up to the amount put in, which is paid off in monthly installments.
The monthly payments are then reported to the credit bureaus, so a credit history can be built.
Secured Credit Card
A secured credit card is another way individuals with a thin credit file can build credit. These products are offered by banks and credit unions. To minimize the risk for banks and credit unions, consumers must first deposit funds into the account to guarantee that the money being borrowed can be repaid in full. Like a credit builder loan, your activity is reported to the credit bureaus.
Find a Co-signer
When you are first building credit, one of the easiest ways to build credit is to open a loan with a co-signer that already has good credit. The co-signer would simply agree to pay all the bills that you are unable to pay, which reduces the risk for the banks. Once the bank approves your loan, you can begin paying it off and start establishing your FICO score.
For credit cards, you can become an authorized user under somebody else’s credit card account. Then, as long as bills continue to be paid on time, your credit score will continue to grow.
Seems easy enough right? Now, you just need to find someone who is willing to put their credit on the line for you!
Alternative Credit Scores
While more than 90% of top lenders in America use FICO credit scores when checking a consumer’s credit history, a traditional credit score is often unable to determine the true creditworthiness of an individual.
That’s why startups like eCredable and ModernLend are evaluating alternative data metrics to access one’s true creditworthiness. By evaluating bill payment information (ex: rent, utilities, insurance, cable TV, mobile phones,etc.), education history, and other metrics, startups are now partnering with financial institutions to provide unserved but creditworthy borrowers access to credit.
Whether you open a credit-building loan, a secured credit card, find a co-signer, or pursue alternative credit scores, there are numerous ways to build your credit with a thin credit file.