We all know that bad credit can harm you in more ways than one. It’s hard to get a credit card and if you do, you pay higher interest rates, it’s almost impossible to get a mortgage or car loan, your insurance premiums are higher than those of people with better credit, and so on. Even your job search can be negatively impacted because prospective employers look at your credit score to determine how responsible and how good a manager you are. And in positions where you handle sensitive financial information, a bad credit score might mean you’re struggling financially, which might make you more likely to commit fraud.
This is hardly news, as the cost of bad credit has long been documented. But what many people underestimate is that the cost of a thin credit file is also high. Simply put, having what the credit industry calls a “thin credit file” is not a good thing: it is a file that contains very little information about your credit history. To understand how this can hurt you, let’s revisit the formula on which your credit score is based. The following parameters come into play:
Payment history: 35%
Outstanding debt: 30%
Length of credit history: 15%
Inquiries & new accounts: 10%
Overall mix of credit: 10%
Now it’s easy to see how lack of information on your file can hurt you. With little or no information on your credit file, it’s almost impossible to assign you a credit score: all the aforementioned criteria will be poor if you have no credit history. It’s estimated that nearly 18 million Americans have files that are too thin to produce a credit score, and another 17 million have no files at all.
As a result, lenders have no way of using their standard procedures for determining who gets credit or not. Thus people with thin credit files are routinely put in the same category as those with bad credit because lenders don’t have the necessary information to make the right decision.
But don’t despair. Options are available to you so you can “fatten” your file. An installment loan from a jewelry, furniture, or electronics store can be a very good starting point. You can also consider a department store or gas station card, but be aware that this is an expensive proposition, both in terms of fees and interest rates.
And should you already have open credit that you use only sporadically, you can improve your credit situation by using those accounts more often to establish a discernible pattern of borrowing money and paying your debts. Also keep in mind that getting different types of credit will help you score better in the “mix of credit” department.
Just make sure that you don’t bite off more than you can chew. You quest to fatten your credit file shouldn’t result in you getting bad credit. Bad credit is more costly than thin credit.