4 Reasons Why My Credit File Is Thin
Thursday, July 5, 2018, 6:00 AM | Leave Comment
We all know the cost of bad credit, but what about the impacts of a thin credit file? And, the most important question is—why does it even matter?
Having a “thin credit file” or a file that contains very few credit records can hurt you, in the same way as a bad credit score. It is so difficult to get a mortgage and car loan, if you do; you pay higher interests for loans and credit cards.
Your insurance premiums are also higher than those with good credit and it may get in the way of getting a good paying job.
Potential lenders, employers and even your spouse to be may look into your credit file to know how responsible and how good you are in the areas of finances.
And, a low credit score (because of having only a few debts) might mean you’re not experienced at handling your debts wisely and that you may not be at the best position to take up another obligation. Sounds disappointing, does it?
You may not have any issue in terms of finances, but here you are-getting judged by people simply because you don’t have enough credit.
Let’s re-examine how your credit score is calculated.
Here are the key factors that come into play.
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Payment history: 35%
It accounts for 35% of your score and it is something that a potential lender looks into, to know if you made timely credit payments. It is true that a few late payments may not automatically kills your score, especially if you have good overall credit history. But, having no late payments because you have zero debts or only a few debts doesn’t mean you’ll get a “perfect score” either.
The credit bureaus look into various types of accounts when computing the score for your credit payment history. Credit cards, retail accounts, installment loans, mortgage loans and finance company accounts are the account types considered for your credit history.
Public record such as foreclosures, wage attachments and lines are also included in the computation. If you have delinquencies in the past and collection items, those things will also appear on your credit file. While you may have no accounts that show payment, your score will also suffer if you have no accounts at all.
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Outstanding debt: 30%
Some people are caught up in the cycle of balancing credit card bills, car loans and mortgage payments. If it is something you’re not familiar with, then good for you. Some people can only make the minimum payments and end up paying higher interest overtime.
If you have very few debts, or you have nothing at all, this parameter may or may not work in your favor. Whether you make credit card payments in full or in part—it doesn’t reflect on your credit file. Whenever you make the minimum payment on time, it will appear as an on-time payment for that month on your credit file.
The only disadvantage is that you have to pay more interest because of a higher debt balance. It will take long it will take you a longer period to pay off your balance and you will pay a higher interest over time.
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Length of credit history: 15%
Do you have to be a veteran in credit just to have a good credit score? First, you need to have some length of credit history; otherwise, there is nothing to compute. Second, for a FICO score, you need at least six months for a credit account.
With good credit choices, it’s quite possible for someone like you with relatively short credit history to have a credit score which is as good as someone with a decade of credit history. It’s about managing your debts.
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Enquiries and new accounts: 10%
If you made “hard enquiry”, meaning you’ve applied for a car loan, student loan or prequalify for a mortgage and other types of credit from some sort of lender, it will show up on your credit report. When someone pulls your credit reports for a reason other than evaluating your credit applications, they will not be included in your credit score calculation.
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Overall mix of credit: 10%
To get a perfect score in this aspect you need to have a good mix of credit lines, such as having a car loan, mortgage, at least two credit cards and a gas credit card.
With the above parameters, it is easy to conclude that having very little information on your file can seriously hurt your score, for the following reasons:
First, it is difficult to assign a score
Second, you will have very low scores on the above criteria
Third, lenders would have a hard time in making the right decision because they have no way of using their standard procedures for determining whether you qualify for a credit or not. So, they may put you in the same category as applicants with bad credit.
How do I “fatten” my credit file?
You can start with safe installment loans, a gas station card or any low-cost debt and pay it off responsibly. Establish a constant pattern of responsible borrowing of money and timely paying your debts to ensure that the way you improve your credit file won’t result in you getting a bad credit.
