You pay your bills on time, you don’t have any credit card debt, and overall, you consider yourself fairly responsible when it comes to spending. You’re ready to apply for business credit cards or small business loans to help you get your future business off the ground and, all of a sudden, you hit a roadblock. Your request is denied and, when you look into it, you find that you have a “thin credit file,” or too-little credit history to qualify for business funding.
This is a frustrating situation for small business owners who have, to their knowledge, maintained a relatively blemish-free financial life. Despite the setback, there is some good news. First of all, don’t assume that you did something wrong. This isn’t a reflection of poor decisions, accumulating debt, or missed payments. Secondly, though it may take some time, it’s something you can easily address if you take the right steps.
Learn how to fix a thin credit file in this article from Nav’s experts.
Thin File — What Does it Mean?
Let’s take a moment and talk about the question at large: What is a thin credit file?
If you have a thin file, then the credit bureaus simply do not have enough information about your credit history to determine your personal or business credit scores. It’s sometimes called being “credit invisible.”
Your personal credit profile is built on the information that is transmitted from lenders or financial institutions to the major personal credit reporting agencies (Experian, Equifax, and TransUnion). This often includes repayment of:
- Mortgage accounts
- Student loans
- Auto loans
- Consumer credit cards
If you don’t have a mortgage, bought your car outright so you don’t have a car loan, have no monthly payments for student debt, or haven’t actively used a credit card, there’s little information being sent to the credit reporting agencies. Other factors that can create a good credit score is using a low amount of your available credit and having a variety of types of credit (think credit card vs. loan). Another factor to keep in mind is that lenders can look at different credit scores as well (like your FICO score or VantageScore) when assessing your personal credit score.
A similar process happens with business credit. Whether your business has good credit or bad credit depends largely on your business’s payment history.
On the other hand, if a significant amount of time has passed since you had an active account of any kind, any reported information may be too old or has since dropped off your credit history completely. This can also leave you with a thin credit file.
While this is responsible for a thin credit file, there are two less frequent situations that may also create a problem:
- You’re mistakenly documented as deceased: In some bizarre cases, the credit reporting agencies may think you’re deceased. In this case you’ll need to contact the agencies or file a dispute.
- You have a split file: This could happen if you move or change your name frequently. If you’ve determined this to be the issue, you’ll need to contact the reporting agencies and request that they merge your accounts.
Is It Possible to Have Good Credit and a Thin File?
Yes, it’s possible to have a good or excellent credit score while also having a thin file. This can happen when you pay your bills on time but you have only a few credit accounts open (typically fewer than four or five, depending on who you ask). For example, if you only have one credit card and one student loan, your credit score might be good but your credit file is thin.
However, there are several ways that a thin credit file can affect your business (sometimes even if your credit score is good), which we explain in the next section.
How Having a Thin Credit File Affects Your Small Business
Your small business will likely face a few issues if you have a thin credit file. First, building credit is essential if you want to take out financing to help your business succeed. That means when you apply to a credit card account, a business line of credit, or another type of loan, you may not qualify. If you do qualify for new credit, your terms may be worse.
The same is true with vendors. You’ll likely appear less legitimate as a business to vendors that you’re trying to create relationships with. Vendors want to be sure that you’ll pay them back for their goods and services, and having a thin credit file doesn’t help to create that confidence. So, if you do manage to sign a vendor agreement, it may come with higher interest rates or shorter repayment terms.
Additionally, the total amount of credit you can access will be lower than if you have more credit accounts. That means you may not have the amount of money available that you require when the need comes up. Also, your credit utilization ratio is lower when you have a higher credit limit.
Building a Credit History
The major credit bureaus for business credit are different from personal credit — Dun & Bradstreet, Equifax, and Experian. Lenders perform a credit check with these bureaus before they will loan your business money, and often they check both personal and business credit. Your creditworthiness can change depending on which scoring model a lender uses as well.
Certain credit accounts like vendor accounts and credit cards will report borrowers’ on-time payments to these credit bureaus, which is one of the most effective ways of building your credit over time. The credit accounts that report are called business tradelines, but keep in mind that they don’t all report, so check that before applying. (Nav Prime gives you up to two actively reporting tradelines reported to all major business credit bureaus).
With a tradeline or credit card in hand, you’ll be able to start building or re-establishing your credit. To do this, you can regularly use a card in small, manageable increments and regularly make payments.
For example, you can put small purchases that you already make, like office supplies or monthly subscriptions, using your credit card. At or before the end of each month or billing cycle, pay the bill in full. Over time, this may help you establish healthy credit and bulk up your credit file.
High credit utilization will not help you while rebuilding your credit. Your goal is to build or re-establish credit, and therefore, this isn’t a time to go out and make huge or unnecessary purchases with your card. Only use your card if you are confident you can pay off the debt at the end of the month. Your credit card activities will be reported one way or another, so it’s important that you add positive history as you rid yourself of a thin file.
How to Fix a Thin Credit File
Assuming you haven’t mistakenly been reported as deceased and aren’t dealing with a split profile, the best way to address a thin credit file is by actively developing credit. But there are ways to do that while staying on top of your business and personal finances. While a lack of a mortgage, car payment, and student loan debt may contribute to a thin file, the answer isn’t to go out and buy a house, a shiny new car, and get back in the classroom.
The easiest way to start building your credit is to use credit cards. However, there is a small catch. Without a credit score, you will most likely have a hard time getting approved for a typical credit card. Other, less risky ways to build credit include using a secured card that reports to credit bureaus, taking out a credit-builder loan, or becoming an authorized user on another person’s credit card.
A secured credit card is good for a first-time cardholder and may allow you to establish credit if you don’t have any. It requires you to pay a cash deposit when you open the account, and this deposit acts as your credit limit — which makes it less risky for the card provider and more likely you’ll get approved. In most cases, the security deposit is equal to, or a percentage of, the total credit allowance.
You’ll need to pay off the full balance each billing period, and the credit card issuer will usually report your payments to the credit card bureaus. If you pay your bills and eventually reach a zero balance, you’ll be able to recoup the deposit upon closing the account or when the lender converts your account from secured to unsecured.
The Nav Prime Card* that’s built into the Nav Prime membership is a charge card rather than a secured card, but your regular payment information is sent to the major business credit bureaus.
A credit-builder loan works differently than other loans. You can often qualify without having a credit score, and you’ll make monthly payments (including interest) but won’t receive the funds until the loan is paid off. Your payments are reported to the credit bureaus the entire length of the loan, which is meant to help boost your credit.
Becoming an authorized user on someone else’s credit card allows you to reap the benefits of on-time payments being reported to the credit bureaus — and you don’t even have to use the card. You can also get a co-signer on your own credit product to boost your chances of qualifying. These situations work best with a trusted family member or friend.
Fixing a Thin Credit File
Now we know how you can start to build a healthy and robust credit profile. Your personal and business credit will help you run your business successfully since it opens up many small business funding possibilities. When you need a new business credit card to increase cash flow, you’ll be more likely to qualify — and it will be easier to get a rewards credit card to get cash back or points for what you’re already spending. And if you’re looking for a small business loan, you’ll likely get lower interest rates and better repayment terms.
Nav Prime offers its members two business tradelines that report to major business credit bureaus: One with the monthly payment and another with the regular use of the Nav Prime Card. Using Nav Prime helps you build business credit history and fix a thin credit file.
*Nav Technologies, Inc. is a financial technology company and not a bank. Banking services provided by Blue Ridge Bank, N.A., and Thread Bank, Members FDIC. The Nav Visa® Business Debit Card is issued by Blue Ridge Bank, N.A., and the Nav Prime Charge Card is issued by Thread Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa cards are accepted. Your funds are FDIC-insured up to $250,000 through Blue Ridge Bank, N.A., Member FDIC.
This article was originally written on October 12, 2015 and updated on January 23, 2024.
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