But what does it mean to have a credit history that is “thin”? This is a financial situation that means you do not have a lot of experience using credit. Every time you apply for a new credit, use it or pay it off, it will be reported to the three major credit bureaus. All the activity connected to your use of credit will be reported – specifically your payment behavior and how often you use credit. If you do not use credit, that means you do not have enough activity reported to the major credit bureaus. That results in a thin credit history. When lenders look at that to calculate your credit score, they would not have much to go with. That would result in a low credit score.
In case you want to improve your credit score, you need to add more entry to your credit report. We all know that a high credit score can be very helpful in opening financial opportunities like a lower interest rate.
Apparently, one out of ten consumers does not have a credit history. This is actually worse than having a thin credit report. There is literally nothing to calculate. If you are one of these people, you will have a very low credit score. If you want to apply for a mortgage or a car loan, it would be hard to get an approval. Either that or your loan will be given a high-interest rate.
How to add more to your credit history
According to statistics, the younger you are, the lower your credit score is. The average score of those between the ages 21 to 34 is 634 while those below 20 years of age have a score of 631. The oldest group has the highest credit score. Apparently, as we age, we get more experience when it comes to the use of credit. That is because we slowly find the need to use credit. We use it to buy a car. We can use it to buy a new house. Sometimes, we even use our credit cards to pay for a vacation. All of these financial transactions go into our credit history.
It is not surprising that the young ones have a thin credit history. After all, they have just gone out of their financial dependence with their parents. Of course, that only means they have to go through the task of building their credit history so it has sufficient entries to help them get a good credit score.
So what does one do in order to have a more substantial credit history?
Think of a strategy when applying for credit
The first thing that some people will do is to apply for credit immediately. This is actually easier said than done. In order to apply for credit, you need to good credit score to get approval and the best terms. But if you have no credit account, how can you have a good score, to begin with? Sometimes, people make desperate choices by applying for credit accounts that have high-interest rates – just so they can have one. This is not how you should apply for credit. You need to ask the right questions and make sure you have the right credit card. Not only that, you have to realize that applying for a lot of credit accounts at the same time will pull your credit score down because of the hard inquiries on your credit report. Just go slow on the application to keep it from damaging your credit report.
Apply for a secured credit
The best credit card for people with a thin credit history is a secured credit card. This is a type of credit account where you have to make a cash deposit. This deposit will act as your credit limit. Be careful when applying for this card because it comes with a lot of fees. However, there are great credit cards that offer a loyalty or rewards program. Just take your time to choose the right card. You can use this card to start building your credit score. Every transaction that is made on this card will be recorded on your credit report.
Use it for small purchases
Your credit report is probably more influenced by the consistency of good credit behavior. That means you are not required to make a huge purchase. You just have to prove that you can pay for the credit that you use. Try not to overwhelm yourself by buying a lot of things with your secured credit card. Remember that you are not just trying to record credit transactions. The ultimate goal is to have a credit history that will help you have a good credit score. To do that, you should only use it for transactions that you can pay off. So start with small purchases that you can pay in full at the end of the month. It will take a couple of months for you to build up your credit history. As long as you are consistent, you should be able to have a sizable history to be considered a low-risk credit borrower.
Once you no longer have a thin credit history, it will be easier for you to apply for an unsecured credit card. These usually have a lower interest rate compared to secured credit cards.
Tips to raise your credit score faster
When you have sufficient transactions reflecting on your credit history, it should be easier for you to bring your credit score up. Here are some tips that you can use.
Make timely payments
The first thing to do is to keep paying your debts – on time. Being late is a big no-no and will not bode well for your credit report. Fortunately, consumers today are starting to realize the importance of making timely payments. According to the data from FICO, delinquencies have gone down considerably – specifically for mortgage payments. That means people are now more conscious of their credit responsibilities and have made payments on time.
Lower your credit utilization
This is your balance-to-limit ratio. The ideal percentage is 30%. That means if your credit limit is $10,000, you should only keep your balance under $3,000. If you are nearing that point, you need to pay off your debt first before you think about using more credit. This will definitely add a few points to your score.
Do not be quick to close credit accounts
If you have too many credit cards and you feel like they are tempting you to be in debt, do not close them yet. When you close these cards before paying off the balance, you will be lowering your credit limit. That can affect your credit utilization. Just hold on to the card until you have paid it off. Just keep it somewhere you will not be tempted to use it. That way, you can keep on paying it without affecting your credit score.
Dispute any errors in your report
Finally, you have to check your credit report every now and then to see if there are any errors. If you find any, you have to dispute it immediately. These errors may have been pulling your credit score down. When you monitor your credit report, you get to see if you had been a victim of identity theft. You need to report that immediately as well.
As you can see, working on your thin credit history is just the start. There are so many things for you to do if you really want to improve your credit situation – and your credit score.