credit
What is a thin credit file?
Credit files are complicated enough, all that secret information about your loans, cards and debts.
But what can you do if you have a thin credit file? Yes this is a thing, really. We look at how this could affect your mortgage situation and how to improve it.
So what is a thin credit file exactly?
Everyone has their own unique credit file, in fact we all have three each.
These files have information that has been built up over years of applying for credit, making the repayments, paying it off and then starting all over again. Everything from car loans, to credit cards, hp and mortgages is stored on the files held at the Credit Reference Agencies.
However, if you haven’t had a mortgage or a loan or applied for any credit then your file will be quite bare. As there has been hardly any credit activity then there’s nothing to be added to the file.
This is a thin credit file. Your lack of previous debt is now potentially going to affect your new mortgage!
Why is this a problem?
Your credit file is your track record for borrowing money and paying it back.
When a lender looks at someone’s credit file and they have a manageable balance on their credit card, a sensible mortgage size and have not defaulted on any loans it conveys to the lender that they manage their money well.
And they could be a good reliable customer.
Alternatively, if during the mortgage underwriting process they look at a credit file with little or no activity they will think hard before approving any application for finance or credit.
There’s no track record to follow, no pattern of financial repayments, you are invisible.
Some people in this situation may also have problems accessing public services. The main reason for this is that a lot of the identity checks are done online and they are based on your credit report. Occasionally this does not return enough information.
How do you improve a thin credit file?
Making your credit file, less thin, is relatively easy but does require some work on your part.
The first thing to do is obtain a copy of your credit report to see what it contains. You will be able to check basic items like your name, address and electoral roll status.
How to check your Credit Report (and why)
Most people over 18 will have information held on their credit file, some more than others. It’s a good idea to check this on a regular basis to make sure the entries are accurate.
Because each of the three main credit agencies hold slightly different data it is prudent to check all three. You’ll be able to look for any mistakes or spot entries that may be fraudulent and related to identity theft.
You have a legal right to access your credit report for free from any credit reference agency. These reports will provide a snapshot of your credit history but won’t include a credit score. For a monthly fee they will provide alerts and enhanced data.
Experian
Use MSE Credit Club, which offers full access to your Experian credit report for free anytime.
Equifax
Use Clearscore, which provides free access to your Equifax report.
TransUnion
Use Credit Karma, which gives you free access to your TransUnion report.
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Building up your credit profile
Your profile is based upon activity, so to improve it we need to create some activity which will generate some entries.
Register to vote
Registering on the electoral roll will boost your credit score and make it easier for credit providers to verify your identity.
Pay your bills on time
Always pay your gas, electric, council tax, telephone, mobile phone bills etc on time. Each time you make a late payment it could get logged on your credit file. Having a good payment profile will show lenders that you know how to manage your spending.
Get some household bills in your name!
If it’s not in your name then it won’t be helping you. Try to get some utility accounts, including water, into your name.
Open a bank account
We are looking for your main bank account to have an approved overdraft attached to it. Approved means that the bank has agreed that you can go overdrawn up to a certain amount. In the beginning this may be a modest amount of money, perhaps a few hundred pounds. This is fine, it’s still credit and it will show on your profile. (Try not to use it though)
Apply for a credit card
Here’s where we need to tread gently.
Having a credit card, even with a low limit, should improve your score. But, each time you apply for a card it gets logged as well. We want to avoid lots of card application entries as this looks bad. It might be worthwhile starting with a credit builder card.
Just use this once a month for a smallish amount and always pay it off in full when the statement arrives.
DO NOT USE PAYDAY LOANS
They will remain on your credit record for a long time and will affect your chances of obtaining a mortgage.
How long will it take to work?
Improving a thin credit file is a gradual process. The three Credit Reference Agencies update their own files approximately once a month.
It will take time and commitment to improve your credit position, but it will be worth it.
The timeframe will depend on where you are now and where you need to be. You should see positive changes between 3-6 months.
Regularly checking your credit report can give you a good indication of your progress.
Can you get a mortgage with thin credit?
It is generally possible to successfully apply for a mortgage, even though your credit file might be a little light. This may mean applying with a specialist lender who will charge a bit more than the high street lot.
We would suggest getting a copy of your credit report first and then discussing this with an independent mortgage broker. They will help you to understand it and may have an opinion about how severe your problem is.
With luck it will be quite simple and you can confidently apply within a few months.
If you have any more questions about thin credit files, or want to know how to improve yours, please get in touch. We’re always happy to help.
What credit score is needed for a mortgage?
It is a common misconception that you must have a minimum credit score to be accepted for a mortgage. Those that have a high credit score are more likely to be successful, but there are many different things that a lender checks and looks into.
