If you have what is called a thin credit file, it means that there is not much information in your credit report. This could be because you don’t use credit very often or if you’re a newcomer to the world of credit. Here's a look at how a thin credit file may impact your ability to get approved for financing the car you want.
How does a thin credit file affect your credit score? Credit scores are determined by a combined analysis of your payment history, length of credit history, amounts owed, new credit, and credit mix. Since payment history is the largest factor taken into consideration, having little information about how reliably someone makes their payments can affect your score. Because of this, if you’re only just starting your credit journey with a thin credit file, your credit score will typically begin in the lower to middle tier range.
There are a number of ways to improve your score if you don’t like where you’re starting. Having a combination of revolving credit, such as credit cards, and installment credit, like loans and mortgages, can be a good idea to help build up both your credit file and your credit score, as long as payments are made on time and in full.
Auto loans can build your credit. While applying for a credit card or loan with a thin credit file can make it a bit more difficult to be approved, that doesn’t mean that it’s impossible, as lenders can likely tell if a low score is due to mismanagement or simply a lack of credit history. If you do get approved, getting something like an auto loan, for example, may be a great way to improve your credit and build your credit report history. This is because car loans are long-term installment loans that can greatly impact your credit report by giving you years to make on-time payments.
Where can you go to get approved with a thin credit file? One of the better places to look for an auto loan may be a special finance dealership that has subprime lenders. Subprime lenders tend to look at more than just the information in your credit report to determine if you are eligible for an auto loan. Instead, they look at income level, employment, residence stability, and they may ask that you can meet certain requirements like a down payment in order to qualify.
If you qualify, you may have higher interest rate charges, but the loan is reported to the credit bureaus which helps you in building your credit.
Another route to take could be working with a buy here pay here (BHPH) dealership. While getting a loan from a BHPH dealer can help you get a car, it is not always a guarantee that they can help you build your credit. BHPH dealers are known as in-house lenders since they are both lenders and dealers. What this means is that, as long as you can show proof that you receive enough income to handle the car loan and put down a large down payment, they don’t need to perform a credit check. Given that they don’t need to perform the credit check, that means they also don’t need to report on-time payments to the credit bureaus, which means your credit score won’t go up for making those payments. If you decide to use a BHPH dealer, be sure to check beforehand that your loan will be reported.
Both these and subprime lenders have experience doing business with thin credit file borrowers. Make sure you do your research to see if either could be the right choice for you.