Is A Thin Credit File Hurting Your Finances?
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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, although not as burdensome as bad credit. As the name
suggests a thin file 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 percent of your score
Outstanding debt: 30 percent of your score
Length of credit history: 15 percent of your score
Inquiries & new accounts: 10 percent of your score
Overall mix of credit: 10 percent of your score
Now it's easy to see how a thin credit 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.
If you have a thin credit file, 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.
About the Author
Wilfrid Baptiste is the founder of Your Finish Rich Plan, a personal finance blog that provides information on thin credit files, as well as other financial topics
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