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A thin credit file can be a roadblock to accessing credit because lenders are unable to determine your creditworthiness if there's not enough information on your credit report. Consumers with thin files can sometimes feel like they're dealing with a paradox: they need to get access to credit in order to fatten up their thin files, but because their files are thin, they can't get access to credit.
However, there are several ways consumers with thin credit files can build up their credit histories. In order to beef up a credit file, you must establish a new credit account that is reported to one of the three credit reporting agencies: Equifax, TransUnion, and Experian (the publisher of this blog). Once you have added one applicable credit account and demonstrate a positive track record of paying it off, you will be able to access more credit and continue building your credit file.
Try these six steps to fatten up your thin credit file:
1. Apply for a Secured Credit Card
One of the best ways to start building your credit history is to apply for a secured credit card, which is specifically designed to help users establish credit. A secured card works just like a normal credit card in that it comes with a credit limit and is accepted by merchants in the same way credit cards are.
However, the difference is that a secured card requires a refundable security deposit in order to open an account. That deposit typically serves as your credit limit.
Once you apply for a secured card and submit your security deposit, which can range between $200 and several thousand dollars (it's your choice), start using the card to make purchases. Make an effort to pay it off in full and on time every month. If you don't, you will incur interest charges, just like you would on any other credit card.
Once you have established a track record making payments on time, your credit history and scores will improve. (If you default on the payments, however, your credit scores will take a big hit—and you will lose the security deposit used to secure your credit line.) Try to keep your monthly spending on the secured card to about 30% or less of your credit line, because credit utilization ratio has an impact on your credit scores.
Many banks that issue secured cards will give you the opportunity to upgraded to an unsecured line of credit once you have made on-time payments for six months or more. In order to ensure that your secured card will help you improve your credit history, be sure to ask the issuer whether they report to one of the three major credit bureaus. (Most secured-card issuers do, but some don't, which is why you'll want to check.)
2. Benefit from Someone Else's Credit History
Another way to establish credit is to piggyback off of someone you know and trust. One way to do that is to become an authorized user on someone else's credit card account.
In this case, only a primary account holder's credit history and scores are taken into account when the bank issues the card. However, an authorized user is allowed to make purchases on the account and receives a card in his or her name.
The primary cardholder has full responsibility for the account, including the ability to make changes. However, the history of the credit account is reported to the credit reports of both the primary cardholder and the authorized user, which is a good way for the authorized user to build credit, provided payments are made on time. If the account becomes delinquent, the primary cardholder is on the hook—but both users will receive derogatory marks on their credit reports.
If you become an authorized user, you should make sure that you have a good relationship with the primary cardholder and that you have clearly established ground rules and communication for using the account.
You might also consider having someone cosign for a new credit account with you. In this situation, your cosigner's income, credit scores, and history are taken into account as well. Essentially, your cosigner is vouching for you—and both your credit scores and credit reports will be impacted by any positive or negative actions on the account.
3. Apply for a Credit-Builder Loan
Credit-builder loans are designed to do just that—help applicants build their credit histories. Such loans are typically available at smaller community financial institutions and credit unions. In most cases, the money you borrow is actually held by the lender in a savings account. Once you have fully paid the loan off is when the funds are released to you.
If you do consider a credit-builder loan, look for one with a relatively short term, like 24 months or less. You should also make sure that the lender will report your payment activity to one of the three national credit bureaus.
4. If You Rent Your Home, Get Your Rental Account Reported to the Credit Bureaus
Some credit-scoring models now use rental data to calculate credit scores. If you have a good track record of paying your rent on time, consider getting your rental payments on your credit reports. Talk to your landlord or property management company to find out if the report rent payments to the credit agencies.
If they don't, you can sign up for a rent payment service such as RentTrack or PayYourRent. For more information on how to do so, see our guide here.
5. Don't Apply for Too Much Credit at Once
If you have a thin file, it can be tempting to apply for a bunch of new accounts in order to accelerate your credit build up. Don't do it—applying for too many accounts can actually hurt your credit scores and set you back even further.
Lenders may get the impression that you are not good at managing credit if there are too many new accounts in a short period of time. Be selective in which accounts you go for, and start slow. Once you have been using a new account for six months, that's when you might consider adding another.
6. Check Your Credit Reports
When you embark on your credit journey, you should also make sure that the information being reported to the credit agencies is correct. Make a habit of checking your credit reports from each of the three credit bureaus: Equifax, TransUnion, and Experian (the publisher of this article).
Look for any inaccuracies or discrepancies, and make sure your new credit is being reported correctly. If there are any problems, you should initiate a dispute with the credit bureau.
Get your free credit report from Experian, where you can also get your FICO® Score☉ . You are also entitled to one free credit report every 12 months from Experian, Equifax, and TransUnion at AnnualCreditReport.com.