What is Thin Credit & How Does it Affect Your Finances?
When you ask for money, one of the first things a lender will do is check your credit. They want to see how you’ve borrowed money in the past, so they can guess how you’ll manage a personal loan in the future.
Most credit scores fall on the spectrum of good and bad, but where does thin credit fit into things? While it may not be the same as bad credit, thin credit may harm your finances.
What is Thin Credit?
Thin credit happens when your record shows little to no borrowing information. If you think of your credit report as a physical document, a thin file may contain one entry about an old account, or it may be entirely empty.
Most people with a thin report are one of two things:
- Invisible
- Unscorable
How Can You Be Invisible?
Invisibility is not something you want when you’re trying to borrow money. It means the major credit reporting agencies can’t see you as a customer. And if they can’t see you, they can’t create a three-digit credit score for you.
This happens if you have zero borrowing experience. If you’ve never taken out a personal loan or online line of credit, you’ve never had information to share with the reporting agencies responsible for generating a score.
How is This Different from Unscorable?
Those people who have a thin file by way of being unscorable may have borrowed in the past, but this data is either incomplete, insufficient, or outdated.
Any of these three things may interfere with a reporting agency’s ability to understand you as a borrower. There’s just not enough current information in your file for them to generate a reliable report.
Who Has a Thin File?
There are a variety of reasons why your report may be on the thin side:
- You’re young. When you’re first starting out, you may have a thin file because you haven’t opened a line of credit or borrowed a personal loan yet.
- You’re new to the country. You can’t always pack your credit with you when you move to a new country, which means a lot of immigrants have to start from scratch.
- You haven’t borrowed in a while. Timing is everything. While you may have been an excellent borrower in the 90s, this record doesn’t speak much to your current financial abilities.
- You’ve borrowed credit that isn’t reported. Not every loan or line of credit online will show up in your file the same way.
What Does Thin Credit Mean for Your Finances?
Whether you’re invisible or unscorable, thin credit results in the same thing: you’ll likely encounter barriers when you want to borrow money.
Here’s why:
A thin file raises a red flag to many mainstream lenders. There’s simply not enough current information in your report to determine how you’ll handle a loan or line of credit in the future.
This means they’ll be going into a loan blind without knowing whether you’ll pay your bills on time. Most mainstream lenders aren’t willing to take that risk, so they deny you funds.
If it’s an emergency, you may find a payday loans direct lender willing to grant you funds, provided you meet their other basic requirements. There may also be line of credit loans for bad credit available to customers with thin files.
These financial products may be convenient for underserved people who can’t get mainstream bank loans. They’re easy to apply for and give a quick boost to your budget.
That being said, they may not build credit history like other loans or lines of credit. You may also pay higher fees to offset the risk of your thin borrowing history.
Good News: A Thin File is Not Permanent
No score — whether it’s good, bad, or thin — is with you for a lifetime.
Your credit isn’t written into your DNA. It’s a dynamic number that changes to reflect your borrowing habits.As a result, many people will see this number fluctuate considerably over their lifetime. In fact, a score can change drastically in just one month, depending on what gets shared to the reporting agencies.
That means you have the power to change things, and you may bulk up a thin file to make your borrowing history look more trustworthy to lenders.
Just be careful of how you fatten up your report. You can’t expect to build up to a good score without establishing healthy, long-term financial habits. If you don’t, you may end up with a thick file that details the reasons why you’re a risk to lenders.
These general borrowing habits help you attach only the good stuff to your record.
1. Pay Bills on Time
What looks impressive to a lender? A borrower who has never missed a due date. It suggests you take your responsibilities seriously and have the funds on hand to cover your bills.
It’s not the end of the world if you miss one here or there, but you can’t make it a habit. Regularly paying your bills late will add negative information to your report.
A budget is one of the best tools to help you with this task. It helps you prioritize your expenses, so you keep enough cash on hand to pay for the necessities. Programming a reminder into your phone is another good idea if you tend to forget about bills and due dates.
2. Keep a Low Utilization Rate
When it comes to installment loans, your payment history takes precedence over the size of your loan. How much you borrow doesn’t really matter, provided you always pay your bills on time.
It’s a different story when it comes to your line of credit and credit cards. While payment history is still important, there’s also your utilization rate that you must keep in mind.
A utilization rate shows how much of your line of credit limit you use and expresses it in a percentage. The only way you can get a high number is by regularly carrying over a balance.
This reflects poorly on your money management skills, as it suggests you don’t have enough cash on hand to make a full payment. Whether or not it’s true is irrelevant — lenders may take it as a sign you’re misusing credit.
Generally speaking, people with good credit tend to keep their rate below 30 percent.
Bottom Line
Unlike good or bad credit, thin credit doesn’t get the spotlight very often. As a result, you may not even know you have it until you attempt to apply for bank loans. By then you’ll know that thin isn’t in.
Just remember, it’s not permanent either. You can change it by adding positive payment history into your file and maintaining a low credit utilization ratio.