Build your creditworthiness: Fix your thin credit file

Picture this: You pay your bills on time, you don’t have any credit card debt, and overall, you consider yourself fairly responsible when it comes to spending. You’re ready to apply for a credit card or loan to help get your business off the ground, and all of a sudden, you hit a roadblock. Your request is denied and, upon further research, you find that you have a “thin credit file.”

A thin file simply means the credit reporting agencies do not have enough information about your credit history to determine your credit score.

Now what?

First of all, don’t assume that you did something wrong. This isn’t a reflection of poor decisions, accumulating debt, or missed payments. Secondly, though it may take some time, it’s something you can easily address if you take the right steps.

Your credit profile is built on the information transmitted from lenders or financial institutions to the major credit reporting agencies (Experian, Equifax, and TransUnion). This often includes:

• Mortgage accounts
• Student loans
• Auto loans
• Credit cards

If you rent (instead of own), don’t have student debt, or have not actively used a credit card, there is little information being sent to the credit reporting agencies. Another reason you may have a thin credit file is if a significant amount of time has passed since you had an active account of any kind. In this case, the reported information may be too old or has since dropped off your credit history completely.

Fix your thin credit file in one step

The best way to address a thin credit file is to actively develop credit. One way to build your credit is to use credit cards. However, without a credit score, you will likely have a hard time getting approved for a typical credit card. In that case, a secured credit card can help you establish credit when you don’t have any.

A secured credit card requires a security deposit or collateral in exchange for a credit limit. In most cases, the security deposit is equal to or a percentage of the total credit allowance you qualify for. If you pay your bills and eventually reach a zero balance, you’ll be able to recoup the deposit upon closing the account or when the lender converts your account from secured to unsecured. With a credit card (secured or unsecured) in hand, you’ll be able to start building or re-establishing your credit. You can regularly use your secured credit card in small, manageable increments and regularly make payments to demonstrate your capacity for repaying debt.

Your goal is to build or re-establish credit and not make huge or unnecessary purchases with your card. High credit utilization will not help build your credit. Only use your card if you are confident you can pay off the debt at the end of the month. Your credit card activities will be reported one way or another, so it’s important that you add positive history as you build your thin credit file.