The size of your credit report is important when it comes to applying for any type of loan. A credit report shows that you have a track record of repaying and that you can rely on a line of credit. If you’ve recently been told you have a slim credit history, you can take steps to build it. Let’s explore what a thin credit report is and how to improve it.
Definition of the light credit report
A thin credit report is one with a limited number of credit accounts. For example, if the only line of credit you’ve ever had is a car loan, that would be considered a thin credit report. Most lenders consider a portfolio of four or fewer accounts to be “thin”.
If you have no credit history, you are considered “invisible credit”. This means that you have nothing positive or negative on your credit report. Invisible credit is always considered a thin credit report.
Common reasons for having a thin credit report
Young adults tend to have poor credit records because they haven’t had time to build up credit yet. Some parents have started adding their teens as authorized users on their credit card to help build their children’s credit records before they turn 18. This gives teens the opportunity to start adulthood with a positive credit score, especially when paired with proper financial education. As much as 17% of tweens in America are authorized users of their parents’ credit card accounts.
Being young isn’t the only reason you can have a slim credit history. If you’ve had little need or desire for a line of credit, you may not have any accounts in your credit history. If most of your credit was from several years ago, your credit history may be thin now. Accounts fall off your credit reports after seven years. This means that someone with a once “big” credit history could have a slim record after years of inactivity.
Immigrants can also have a slim credit history when they come to the United States, even if their credit was strong in their home country. This is because the United States measures credit differently from other countries and the data is generally not transferable. American Express
The downside of having a thin credit report
Having a thin credit history can make it difficult to obtain credit in the future. A home loan, credit card, personal loan, or other form of loan may be refused due to a lack of credit history. You may not need a line of credit now, but what will it be in five years? Building a strong credit portfolio can take years. If you take these steps now, you may have credit available when you need it most.
Is thin credit bad credit?
It’s important to distinguish between thin credit and bad credit. Bad credit refers to a default or some other negative mark on a person’s credit report. Lean credit is a lack of credit accounts, whether or not payments made were made on time. A person can have good or bad credit with a slim credit history. A person with bad credit can have a strong credit history. The two terms do not always go hand in hand.
How to build your credit portfolio
Want to fatten up your slim credit history a little? Here are some steps that may help you:
- Start with a small line of credit. It could be something like a secured credit card, an entry-level credit card, a student credit card, or a small personal loan. Approximately 38% of consumers use credit cards to become visible credit. Make sure the line of credit will report to all three credit bureaus and make your payments on time each month.
- If you already have a credit card, use it! Put all your daily purchases on the credit card and pay off the entire balance at the end of the month. This will show a consistent credit history and could lead to a larger credit limit in the future.
- Diversify your credit portfolio. If you have a car loan and nothing else, apply for a low interest credit card. The goal is to diversify your credit history so that lenders can see your true creditworthiness.
- Avoid applying for all at once. You want a diverse credit history, but you don’t want to look desperate. Once you’ve established a new line of credit, wait about six months before applying for a new one. Building credit takes time.
- Get help from someone with good credit. You can do this by becoming an authorized user on their credit account or by having them co-sign a line of credit with you. Keep in mind that missing a payment or racking up an unexpected bill will negatively impact both their credit and yours. Only agree to this if you can agree to the payments.
- Check your credit reports for existing accounts. If you have old debts or anything in collection, pay them off to revitalize your credit. This creates a solid foundation for a portfolio of positive accounts.