How open banking can help “thin file” borrowers

If you’ve been looking for a personal loan or credit card, you might have come across the term “thin credit file”.

It’s a piece of industry jargon that some lenders use to refer to people for whom limited credit history is available. Literally, a “thin file”. Experian, one of the UK’s largest credit reference agencies, estimates (1) that there are as many as 5.8m thin file borrowers out there.

Unfortunately – and through no fault of their own – thin file borrowers find it harder to access credit.

Things aren’t as bad as they might seem though – having a thin credit file needn’t present too big of a hurdle, and there’s plenty you can do to build up a score over the short and long term.

In this article, we’ll go into more detail on what constitutes a thin file borrower, and what you can do if being a thin file borrower is preventing you from accessing credit.

And before we get started, it’s worth saying that we know all about thin file borrowers – in fact, one of the reasons we set up Koyo is because we think we can do a better job of lending to them than other providers out there. Why?

Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation – rather than just what someone else says about you. If that’s of interest, you can get a quote at www.koyoloans.com (representative APR 27%).

If you want to know more about thin file borrowers though, read on!

What does a thin credit file mean?

If you’ve never borrowed money in the UK, you would be a prime example of a thin file borrower.

To understand this, we need to look a little more carefully at credit scores.

In many ways, credit scores are pretty useful. Your credit report allows lenders to quickly see whether or not you’ve repaid credit in the past, providing at least some insight as to how likely you are to repay credit again in the future.

But there’s a problem: in order to build up a good credit score, you need to borrow some money. That might seem counterintuitive – perhaps you’re so good at managing your personal finances that you’ve never needed a loan?

That’s a fair challenge and shows one of the limitations of credit scores as a measure of creditworthiness. The way to think about it is this: if you haven’t borrowed money in the past, a credit bureau can’t look at your loan payment history in order to see how good you are at paying it back. That means you’re an untested quantity, and borrowers will tend to err on the side of caution.

To re-use an analogy we’ve used in the past: the Queen has never lost a boxing match against Mike Tyson. But that doesn’t mean her odds would be good if they went toe to toe in the ring.

Getting the basics right

As well as credit information, would-be lenders also look for basics, such as your address history, whether you’re on the electoral roll and whether you have a current account. Without this basic information, there’s a risk that lenders won’t have enough information to make good decisions about lending you money.

There’s certainly nothing wrong with being a thin file borrower. It doesn’t reflect badly on you, and it’s not something you need to avoid at all costs. However, it is harder to access credit if you have a thin credit file. So what can you do about it?

What are the most common reasons for a thin credit file?

There are many common reasons why you might have a thin credit file. Some examples include:

• You might be a young person who hasn’t had a chance to access credit before

• You might be new to the UK

• You may not have used credit in a long time

• You might be recently divorced (if your finances were tied to your ex-partner, you may find you’re having to start from scratch again when it comes to your credit history)

• You may just never have needed or wanted a credit card or loan

The unifying theme is a lack of borrowing history and more generally, a lack of information for would-be lenders to base decisions on.

How does a thin credit file impact your ability to borrow money?

People with a thin credit file are likely to find it much more difficult to borrow money, even if they’ve never had problems with debt in the past.

As we’ve explained above, that’s because lenders need to know lots of different things about you, in order to make an informed decision.

What that means in practice is that if you have a thin credit file, you might struggle to borrow money from many lenders or take out a new credit card, and will likely pay higher interest rates.

There are exceptions, such as Open Banking lenders, which we’ll cover later on in the article.

How can you fix a thin credit file?

If you have a thin credit file and want to build it up, there are many different things you can do to make a positive difference. Experian (one of the UK’s three main credit bureaus) has a great UK guide (2), and here we’ve summarised some of the key points. You should:

• Get on the electoral roll

• Open a current account, and use it responsibly

• Get a monthly mobile phone contract (making these payments makes a positive difference to your credit score)

• Put household bills in your name – in many cases, providers now share information with credit reference agencies)

One extra tip: You can use a service like Experian Boost, which uses Open Banking to get an up-to-date picture of how you manage your money, which can increase your credit score by including things like utility bills.

You can also use these suggestions ahead of time, to avoid becoming a thin file borrower in the first place.

Another tip that can help over the long term is to take out a credit card (sometimes you’ll see these marketed as credit builder cards), and use it to make small purchases from time to time, using only a fraction of your credit limit and being sure to pay it off in full each month. This will help you to show lenders that you are capable of managing debt, and by paying it off in full each month, you avoid any interest payments.

Lastly, if you’re new to the UK, we’ve put together a specific guide just for you: how new arrivals to the UK can build up a credit score.

How can Open Banking lenders help borrowers with thin credit files?

Open Banking can make a real difference for borrowers with thin credit files. As well as the Experian Boost service that we mentioned above, certain lenders (such as Koyo) use this technology to securely view your current account data.

This allows Open Banking lenders to see how affordable a given loan is for you, and makes them less reliant on credit scores. Open Banking is free and safe to use – to find out more, you can take a look at our full guide, or head straight to our loan calculator to see what your repayments would be, Representative APR 27%.

For a deeper dive into Open Banking, take a look at our more detailed guides: Open Banking explained, and Is Open Banking safe?

Conclusion

All of us will have a thin credit file at some point – generally when we first start our first jobs or arrive in the UK for the first time. It’s not a problem in itself, but it can make life difficult when you need to apply for credit.

Thankfully, there’s lots you can do to address the problem, whether that means building up your credit score or simply finding an Open Banking lender such as Koyo that isn’t so reliant on your credit history.

Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation – rather than what someone else says about you. If that’s of interest, you can get a quote at www.koyoloans.com Representative APR 27%.

We’ll cover off some of the most frequently asked questions we get about thin files, but if there’s anything else you’d like to know, let us know in the comments section below!

Frequently asked questions about thin credit files

What does it mean to have a thin file or no credit?

A thin file borrower is someone for whom little or no credit information is available. There are an estimated 5.8m people in this category, according to Experian (one of the UK’s largest credit bureaus).

A thin file is different to a bad credit score: there’s no suggestion that you’ve ever missed a payment for example. The issue is simply that a credit bureau doesn’t have enough information on you to allow financial services companies to make an informed decision.

Each of the UK’s credit bureaus (Experian, TransUnion and Equifax) allow you to check your personal credit report for free online, so you can see if you’re affected. And don’t worry: checking your own credit history doesn’t affect your credit score.

Is having a thin credit file bad?

Having a thin credit file doesn’t reflect badly on you: it’s not a sign of financial mismanagement and doesn’t mean that you wouldn’t be able to afford a loan.

However, what it does mean is that most lenders will have a harder time lending to you because they can’t see your track record. That means you’ll find it harder to access credit, and will likely need to pay more for it.

While there’s no hard and fast answer, we’ve put together a more detailed guide to what credit score you need for a personal loan, as well as more information on loans for first-time borrowers.

Can you buy a house with a thin credit file?

It’s very unlikely that you’d be able to get a mortgage with a thin credit file. When lending hundreds of thousands of pounds, banks like to get extremely comfortable with your credit history – so if you’re considering buying a house, it’s worth building up your credit score over the long term using the tips above.

Might I be rejected for a loan if I have a thin credit file?

Yes – having a thin credit file makes it harder for lenders to be confident that you’ll repay a loan in full, so you’re more likely (although by no means guaranteed) to be rejected.

That’s why it’s important to build up a credit score if you can. If you have been turned down for a loan, you can also take a look at our more detailed guides: reasons for personal loan rejection, and what to do if you’ve been refused a loan.

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Footnotes:

(1) https://www.experian.co.uk/assets/consumer-credit-risk/making-the-invisible-visible.pdf

(2) https://www.experian.co.uk/consumer/help-discover/discover/guides/the-invisibles.html